NAFCU Requests New Exemptions to CFPB Payday Lending Rule
Inside Subprime: Aug 13, 2018
By Lindsay Frankel
The National Association of Federally Insured Credit Unions has asked the Consumer Financial Protection Bureau to add exemptions to its payday lending rule for payday alternative loans. The rule, which caps interest rates and requires lenders to confirm a borrower’s ability to repay the loan, already contains an exemption for PAL I Loans. These loans, which come in amounts from $200 to $1,000, are only issued to credit union members and cost less than payday loans. The maximum annual percentage rate is 28 percent when compared to the triple digit interest rates typically charged on payday loans, and the application fee must not exceed $20. Rollovers aren’t allowed, and members can’t borrow more than three times in a six-month period.
In a letter to the CFPB, the NAFCU asked the CFPB to expand the exemption so that it covers the new PAL II loans, which would not require borrowers to have been members for 30 days. “Expanding the safe harbor exemption to encompass loans compliant with any of NCUA’s PALs programs will assist in widespread adoption of the PALs program amongst credit unions,” NAFCU wrote in the letter. “Expansion of the safe harbor exemption will give credit unions peace of mind knowing that they are in compliance with both the NCUA and the bureau’s rules.”
The new loans would have no minimum amount and would permit borrowers to take out as much as $2,000 at a time. Another key difference is that the PAL II loans don’t place limits on how many loans a borrower can access in a six-month period, although they don’t allow borrowers to hold multiple loans at a time.
The letter contends that members of the NAFCU have concerns over the compliance of PALs II, and that future PAL programs may not have protections from the CFPB’s proposed rule unless the bureau expands the exemption. The letter asks that all credit unions be exempted from the payday lending rule in general. At a minimum, the NAFCU recommends that the CFPB expand the exemption to include PALs II, explaining that credit unions would be more likely to adopt these programs with this reassurance of compliance.
The letter also states that “Greater competition in the marketplace will lead to greater innovation, and will ultimately force high-cost, traditional payday lenders to improve their product offerings, leading to safer products for consumers.”
While payday loans are known to be risky products due to their high interest rates and fees, there is a definite need for short-term, small-dollar loans. A recent survey showed that 40 percent of adults don’t have $400 to cover an unexpected expense. People with bad credit often turn to payday loans during financially-strained times, but credit unions have the capacity to offer a safer, lower-cost alternative. The NAFCU asserts that expanded exemptions to the payday lending rule will help credit unions better meet the needs of their customers.