To examine the dilemma organizations face in dealing with low-income clients when the choice is between meeting immediate needs versus long-term education for financial responsibility

Case Study 14

Abstract
A nonprofit or public organization faces a wide range of issues and responsibilities regarding its dealings with consumers of its services. In the following case, the lending policies of a credit union toward the low-income households it serves come under close scrutiny. This case study asks whether it is the responsibility of a public organization to help its customers take more control over their own lives, in this instance, their financial situation.

Main Topics

Social equity, Implementation/evaluation

Secondary Topics

Financial management

Teaching Purpose

To examine the dilemma organizations face in dealing with low-income clients when the choice is between meeting immediate needs versus long-term education for financial responsibility

The Organization

Community Credit Union (CCU) is a nonprofit organization with a commitment to higher customer service, including offering loans at lower interest rates than for-profit banking institutions.

Main Characters

Cortez McDuffy, Lead Teller at a CCU Branch Bank

Alma Murphy, Customer

Lucinda Tassels, Branch Manager

Molly Salamone, CCU President

Paul Woodbine, Former Credit Union Bank President

BACKGROUND

Credit unions are nonprofit financial institutions, typically composed of persons who share a characteristic, such as living in a certain geographic region; membership in professional associations or private corporations; or employment as civil servants within local, state, or federal government. The capital of credit unions comes from the purchase of shares by members, who in turn receive dividends based on their investment. Unlike other banks, credit unions are not driven by profit motives. Instead, they are committed to providing a higher quality of customer service and issuing loans at lower interest rates to their members than do for-profit banks.

Within the Centreville metropolitan area, the Community Credit Union (CCU) is a rapidly expanding financial institution, with a mission to provide a high level of services to its members. In Communitys case, each member pays a nominal $5 fee to join. Everyone who banks with Community is treated as a stakeholder and beneficiary of its future success or failure. According to its mission, success is based on two criteria: customer satisfaction and the credit unions ability to provide appropriate products and advice for members to grow their wealth and to achieve a certain level of financial responsibility. These commitments are summed up by a phrase the institutions management uses: To serve the community without profit or charity.

CCU traces its origin to members of the Centreville Suburban Teachers Association (CSTA). As time went on, membership and total assets of the cooperative grew rapidly, spurring the credit union to change its name to Educational Employees Credit Union (EECU). The new name reflected expanding membership eligibility to those outside the teaching profession and away from the immediate metropolitan region. EECU continued to merge with smaller educational credit unions until it combined with Universal Credit Union (whose membership included manufacturing employees). Finally, the institutions name was changed to Community Credit Union to more accurately describe the diverse membership of the organization.

In order to maintain a competitive edge with rival credit unions and for-profit banks, CCU strives to offer a wide variety of special services to its membership. However, one service in particular, Courtesy Pay (C-Pay), has come under sharp criticism by some inside and outside the organization. C-Pay is designed to prevent extra fees and the embarrassment that can result for members who overdraw their accounts either by bouncing a check or using their debit card. If a check or debit exceeds what is in their account, Community will cover the transaction up to $300. However, with this coverage comes a $25 fee. This is a lower price compared to the extra costs members would incur from other financial institutions; other banks would also assess a fee for the returned check or debited item.

The problem with this program is that some members have discovered how to use C-Pay in a way that was not intended by the credit union. For example, members who have a zero balance in their checking account are still qualified to receive the benefits of the C-Pay system. All they need to do is go to a branch and write a check to themselves for $275. The $25 fee is taken from the Courtesy Pay reserve, and the remaining $275 is given to the member. Before they can access this again, however, they must repay any outstanding loans. Nonetheless, members can repeat this process over and over again, without facing penalties, as long as they repay the debt.

THE CASE OF ALMA MURPHY

Lead teller Cortez McDuffy describes her experiences with one member, Alma Murphy, who is representative of others who abuse the C-Pay privilege. Alma always has a very low account balance, if any at all. Also, any loans she has are usually late in being paid. She is a nice lady so I let her come in and do this. She uses the program a couple times a month on average.

CCU President Molly Salamone echoed these sentiments and added, The financial situation for members like Alma isnt good. They dont seem to have their priorities straight when it comes to their finances.

Alma is employed in a low-income job as an assistant office manager in a small factory. She is trying to raise two grandchildren, largely on her ownshe does receive some government support. Her daughter is in prison on a drug charge, and the father left the family long before. As might be expected, her life is hard, but Alma is not one to complain. She refuses anything that might be construed as a handout and is determined in her effort to raise her grandchildren by herself and not allow them to go into foster care.

McDuffy went on to say, Members like Alma think C-Pay is a line of credit even though it definitely isnt. There is one member with us who had fifty-one returned items (checks or debits) from last year. Currently, she is at forty-three returned items for the year. She could not have accidentally overdrawn her account that many times. Alma isnt as bad but she does return items more than the average member. Also, people dont pay attention to the fees because theyre living week to week.

Some of our members think C-Pay is a service to be accessed anytime they want and that its there to be abused. If people were properly educated about the financial consequences of their actions, maybe they would use it less, stated Salamone.

When asked if she has done anything to dissuade members like Alma from using the service, Salamone said that she often tells them about the credit unions overdraft line of credit (LOC) service, which charges an annual interest rate that is much less than the automatic $25 fee for each bounced item. However, many of the people like Alma who intentionally access C-Pay often do not qualify for lines of credit because of low credit scores. Concerning LOC referrals, McDuffy said that even if members did qualify for this overdraft service, they would just max it out and still access their C-Pay. He continued, Since this is a service designed to help members who inadvertently overdraw their account, members with excessive use of this service should be counseled on managing their checking account in a more responsive manner.
But no mention is made of what constitutes excessive use, who will guide members to counseling, or who will provide this counseling.

In addition to the rules for the C-Pay system, CCU is guided by its mission statement, organizational values, and a member pledge. Particularly, the pledge contains four points that seem to contradict the organizations decision to allow members to use C-Pay as a line of credit. These include the promise to understand customers financial needs to help them with their financial understanding and to promote financial solutions and security.

If an important part of CCUs mission is to truly help its members to become more financially responsible, then it should be asking Alma and other people who overuse C-Pay to seek financial counseling. However, taking this course of action poses some significant challenges to the organization. Branch Manager Lucinda Tassels, for example, said that Community does not possess the infrastructure and tools needed to help members better understand the long-term financial repercussions of using C-pay frequently.

Additionally, the contact that managers and financial service representatives (FSRs) have with members is more limited than the frequent interactions that they have with tellers in their day-to-day banking business. When tellers notice a problem, they often refer members to LOCs. However, as stated previously, many members do not have high enough credit scores to qualify for this service. In other instances, tellers counsel members to discuss their situation with FSRs or managers and to talk about the fees that they incur with C-Pay as well as ways to prevent them. This places the decision to seek help entirely in the hands of the members. If they choose not to seek help, there is currently little the credit union can do.

Even though tellers are on the front lines in dealing with customers, they are not asked to provide input in any meaningful way to the decision making of upper-level management. It is not that the managers refuse to listen to the tellers, the tellers just do not routinely give advice to their bosses regarding what they view as administrative matters nor do the managers ask the tellers for their suggestions.

COMMUNITY CREDIT UNION MISSION AND VALUES

CCU is a nonprofit organization that takes very seriously its commitment to members and the larger community. Tellers, supervisors, and branch managers at CCU are supposed to help members manage their finances in a responsible way. For the most part, this does happen and is a reason why CCU has grown to its large size today. As its motto, To serve the community without profit or charity, suggests, this is an organization that tries to put its patrons first.

Tassels said that CCU is a place where people help people. She added, Putting people further in debt through C-Pay isnt helping them. But, on a service level, we can fulfill their needs by helping them pay their bills.

Salamone agreed with these sentiments by adding, Our credit union is designed to help people. C-Pay, like it or not, does this by allowing them to pay their bills. But, it also seems like were helping them to get one step ahead only to bring them a few steps behind when they are continually paying these fees.

Thus, it appears that employees at CCU have mixed feelings about the use of C-Pay, which pits the credit union mission against serving the short-term needs of its members. Although CCU views itself as a proactive organization in terms of serving the community, in this instance, it seems to promote a policy that encourages its members to behave in ways that are antithetical to its service pledges.

Despite the caring organizational culture that CCU tries to foster, there are some questions behind its deeper motives involving C-Pay. Nonprofits, despite their name, still have to make money to survive and continue to offer their services to the public.

Paul Woodbine, a former credit union bank president says, In contrast with for-profit banking centers, credit unions impose very few fees on their patrons. Aside from monetary penalties for failure to make loan payments in a timely manner and non-sufficient funds (NSF) fees for returned or overdrawn items, few charges are assessed. As a result, the few fee sources are all the more important.

Thus C-Pay, whether intentionally or unintentionally, is one of the largest moneymakers for CCU. If four people intentionally access their C-Pay at any branch in one day, the salary for one part-time teller for one day has been covered. In a weeks time, at least fifteen to twenty, if not more, of these transactions will take place at each one of the branch locations. In the case of the member who had fifty-one NSF fees in a year, the credit union received $1,275. Thats the equivalent of 127.5 hours paid for a part-time teller making $10 an hour. Thus CCU, although nominally committed to member service, can little afford to implement a policy of aggressively preventing members from overdrawing their accounts; if it did so, the organization would stand to lose hundreds of thousands, if not millions, of dollars in income from this single fee.

Woodbine said, This is the trap for credit unions. They either charge the fees and look the other way or they have to raise their prices for their basic services.

Tassels admitted that C-Pay is a moneymaker for CCU, but she also stands by her belief that the credit union is helping a vulnerable segment of the population. Without C-Pay, these people would have nothing, maybe payday loans, but thats worse than nothing in my book.

President Salamone agreed, saying, Granted, C-Pay is often abused and a strong case can be made for financial counseling. However, lets look at the reality of these peoples daily lives. These are often hard-working family people without a lot of resources. They need the money for rent and groceries. Theyre not going out and spending their C-Pay on drugs or booze. Until something better comes along, this is the best alternative to the price-gouging payday lenders. Yes, they do need counseling but ask yourself if you were in their shoes, which is the rational decision, food for the grandkids or financial responsibility?

EVALUATION OF C-PAY

Woodbine, the former bank president, suggested one solution that would entail an evaluation of the credit unions C-Pay policy. In this way, CCU could rationally weigh the pros and cons of retaining C-Pay. A simple benefit-cost analysis would look at measuring the benefits and costs of C-Pay in dollars. The decision rule would then be straightforward and easy to apply: if C-Pays benefits exceed its costs in terms of dollars, then the program should be retained. However, the following question arises: Whose benefits and costs should be included? Thus, as seen earlier, C-Pay has clear monetary benefits for CCU and also for the members. But how does one include the long-term costs of financial irresponsibility on the part of customers? Another issue that would need to be addressed is how are intangible benefits and costs to be included? For instance, how does one measure the benefits of members learning how to become more responsible in their financial planning? What are the social costs or benefits of C-Pay? In other words, does C-Pays encourage fee paying instead of saving?

Discussion Questions

1. Do you believe Tassels and Salamone when they imply that CCU is living up to its member pledge and core principles in allowing members to intentionally access the C-Pay system? What are the implications of your answer for organizational transparency?

2. Should the tellers have more of a role in CCUs decision making? Explain.

3. How would you evaluate CCUs C-Pay? What would be your criteria for successful outcomes?

4. Suppose you are on the board of directors for CCU. You have just heard a presentation regarding the C-Pay program. The board has been asked to consider a fundamental change to the system that would prevent members from intentionally bouncing checks to access their C-Pay. Would you support this proposal? Why or why not?

5. What are some of the potential drawbacks or advantages for CCU if this change were adopted and implemented? Explain.

APPENDIX B
C-Pay Regulations and Criteria

Courtesy Pay is a service designed to help the members avoid additional fees if they inadvertently overdraw their account.

Courtesy Pay is not a Line of Credit. It is literally a courtesy that we will extend to our members (whose accounts meet certain requirements) to save them the embarrassment and inconvenience of returned item(s) as well as costly fees that merchants normally charge for items returned to them.

Here is how Courtesy Pay works:

After members exhaust their Overdraft Protection Line of Credit and/or Regular Savings, (subject to REG D), we may, at our discretion, honor the members overdraft transaction(s) up to $300 (after first subtracting our standard NSF fee[s]). This will result in a negative Checking Account balance. The member will then have 30 days from the original date that the account went negative to make the required deposit(s) to bring the account positive.

Courtesy Pay is a discretionary, noncontractual (the member doesnt sign anything to receive or opt out) service. This service is offered to the members on a case-by-case situation and can be revoked at any time. Since this is a service designed to help members who inadvertently withdraw their account, members with excessive use of this service should be counseled on managing their checking account in a more responsible manner.

After ninety days, new checking accounts meeting the following criteria will be eligible for Courtesy Pay:

1. Open share draft (checking) suffix 9

2. Share draft (checking) open at least 90 days

3. No negative balances in any suffixes of more than $5.00

4. Primary member is at least 21 years of age

5. Deposits of at least $900.00 to share draft (checking) during the previous 90 days

6. Courtesy Pay field on member profile contains NA

7. Member code is not Org, House, Deceased, Escheat (funds in account are in the process of being transferred to the State as abandoned), BK, BK7, and BK13

8. Miscellaneous checking field does not contain ATM, Bad Address, BK, CCCS, CMS Collections, C/O, Code 4, Deceased, Does Not Qualify, Fraud, Negative, Opt Out, PIF, RTC, RTCK, Security, or TransWorld

9. Check Systems Field on MP does not contain Fail

10. No dormant restrictions

11. No loan delinquency of 15 days or more

12. Credit Card status on member profile does not contain: B, C, X, A, D, E, CO, CX, FO, EX, EO, E_, _X, _D, Z

13. No Mail field on member profile does not contain No Mail or Bad Address

14. NSF count on member profile cannot exceed 3 for current year

Courtesy Pay Removal Criteria

15. Negative balance in excess of $10.00 for 33 or more days

16. Negative balance in excess of $360.00

17. Courtesy Pay Notice returned as returned mail

18. Notice of bankruptcy filing

19. Deceased member notification

20. Closed account

21. Accounts in escheating process (funds in account are in the process of being transferred to the State as abandoned)

22. SecurityFraudGarnishment on account

23. No loan delinquency of 45 days or more

24. Returned check notification

25. Right to Cure notification on any loan

26. CCCS/Debt management

Courtesy Pay Re-Qualification Criteria

27. Problem or issue surrounding Courtesy Pay program removal must be resolved.