Credit Union Proposed Payday Alternative Generates Heat
Inside Subprime: Aug 7, 2018
By Kerry Reid
Predatory payday loans are marketed as financial products designed to fill the gap between paychecks for people who don’t have access to traditional lines of lower-interest credit through banks or credit unions. Headquartered in Virginia, the National Credit Union Administration is the federal regulatory agency that governs credit unions. The NCUA hopes to pull more people away from storefront lenders by expanding its Payday Alternative Loan (PAL) program. However, the comments on the NCUA’s new proposal and pushback from consumer groups may make it a hard sell both inside and outside the industry.
Currently, the PAL program (created in 2010) allows federal credit unions to provide loans between $200-$1,000. The term of the loan must be from 1-6 months, and the borrower must have been a member of the credit union for at least one month. The PAL cannot be rolled over. Also, the credit union can only charge administrative fees in line with the actual costs of processing the loan, not to exceed $20.
As reported by the Credit Union Times, the NCUA board is seeking to add another PAL option in the mix that would allow both larger loan amounts and longer repayment terms. There would be no minimum loan amount, and the maximum would increase to $2,000. The repayment period could be as long as a year, and there would not be a minimum length of membership requirement for credit union members to take out a PAL (though a borrower would still need to be a member to qualify). Additionally, an existing requirement prohibiting no more than three loans to a member in a six-month period would be waived in the new PAL, though credit unions could still only make one loan to a member at a time.
Baumann’s article noted that Martha Ninichuk, director of the NCUA’s Office of Credit Union Resources and Expansion, said that the hope was that the new PAL would encourage more credit unions to offer the loan products. She noted that, while the total dollar amount of these loans has gone up, there has only been a “modest” increase in the number of credit unions offering PALs.
The NCUA payday loan also caps the annual percentage rate at 28 percent – well below the 36 percent cap sought by many agencies, including the Consumer Financial Protection Bureau (CFPB).
So what’s controversial about this?
On the industry side, the comments made on the proposal (which were due on Friday, August 3) indicate that the credit union trade groups believe that the new PAL is still too “prescriptive” to encourage more participation by their members.
As reported by Baumann on August 3 for Credit Union Times, Monique Michel, senior director of advocacy and counsel for the Credit Union National Association, or CUNA stated “CUNA believes that credit unions are ideally situated to satisfy these lending goals, as opposed to unscrupulous payday lenders,” adding “CUNA would prefer a holistic approach to PAL products that would provide credit unions and consumers with flexibility to tailor short-term, small-dollar loans to their needs, without being overly prescriptive.” According to Baumann, Michel also noted that the 28 percent cap would continue to hinder participation by credit unions in the PAL programs.
This was echoed by Kaley Schafer, the regulatory affairs counsel for the National Association of Federal Credit Unions, or NAFCU, who urged “flexible parameters allowing credit unions to establish loans that work best for their members.” While she praised the elimination of the one-month membership requirement for a borrower to obtain a PAL from a credit union, she also noted that the NCUA should work to make sure that these short-term loans have a “safe harbor” from CFPB rules.
Those rules, instituted by former CFPB director Richard Cordray, can be found here. The 2010 PAL program was exempted from the CFPB regulations, as Baumann reported in his May 24 article. However, with the departure of acting CFPB director Mick Mulvaney and the appointment of Kathleen Kraininger, the future status of those rules remains questionable.
On the consumer side, Kelly S. Griffith, executive director of the Center for Economic Integrity, commented that the fee structure in the proposed program would drive up fees for consumers and that eliminating the one-month membership requirement would mean that credit unions would have less information available on prospective borrowers – including their ability to repay the loans. She advocated that “Underwriting for credit union loans should be based on ability to pay, considering both income and expenses.”
Skepticism about the program was also expressed earlier by Rebecca Borne, senior policy counsel at the Center for Responsible Lending. In a May 31 Baumann article for Credit Union Times, Borne said “We’re concerned about further encouragement of a significant fee-per-loan model.”
However, not all consumer researchers and advocates were wary. Alex Horowitz, senior research office for the Pew Charitable Trusts Consumer Finance Project, told Baumann in May that “Giving credit unions more leeway to serve their members who are using payday and other high-cost loans is the right move.”
What the next step will be for the new PAL proposal remains to be seen. NCUA will undoubtedly be paying attention to the feedback it’s receiving, and will be keeping a close eye on changes at the CFPB as well.