At the September town hall meeting, the National Credit Union Administration (NCUA) voted 2-1 to approve the final rule related to the expansion of alternative payday loan options (PAL II). Although the NCUA made it clear in the final rule that PAL II does not replace PAL I, the flexibility of PAL II will create new opportunities for borrowers to refinance their payday loans or other debt obligations under of the PAL II loan model. It is important to note, however, that credit unions can only offer one type of PAL to a borrower at any given time.
The main differences between PAL I and PAL II are as follows:
Based on the NCUA’s discussion of the comments it received, one of the most burning questions was the interest rate for the PAL II. For PAL I, the maximum interest rate is 28% including financing costs. The NCUA reported that “many commentators” have called for an increase in the maximum interest rate to 36%, while consumer groups have pushed for an 18% interest rate cut. Ultimately, the NCUA chose to keep the interest rate at 28% for PAL II, explaining that, unlike the CFPB rule and the Military Lending Act, the NCUA allows the levy of an application fee of $ 20. $.
PAL volume restrictions
Based on the NCUA’s discussion of the comments it received, one of the most burning questions was the interest rate for the PAL II. For PAL I, the maximum interest rate is 28% including financing costs. The NCUA reported that “many commentators” have called for an increase in the maximum interest rate to 36%, while consumer groups have pushed for an 18% interest rate cut. Ultimately, the NCUA chose to keep the interest rate at 28% for PAL II, explaining that, unlike the CFPB rule and the Military Lending Act, the NCUA allows the levy of an application fee of $ 20. $.
The NCUA also discussed the current limitation that the total amount of a credit union’s PAL I loan balances cannot exceed 20% of the credit union’s equity. The final rule specifies that the combined PAL I and PAL II loan balances of a credit union cannot exceed 20% of the net worth of the credit union. This limitation has been the subject of criticism from those seeking an exemption for low income credit unions and credit unions designated as community development financial institutions where payday loans may be more prevalent in the community. surrounding. The NCUA declined to consider the net worth cap because it was outside the scope of the rule-making notice, but the NCUA has indicated that it will reconsider those comments in the future, if appropriate. Of course, in light of the OCC’s recent comments on modernize the Community Reinvestment Act (ARC), the NCUA will likely revisit lending issues for low-income credit unions.
Implications of the CFPB Small Dollar Rule
Finally, in response to several commentators, the NCUA made it clear the impact of the CFPB’s small dollar rule on PAL II. As stated in our in two parts online seminar, the CFPB’s Little Dollar Rule imposes significant changes in consumer lending practices. However, due to the “regulatory landscape” associated with the CFPB’s small dollar rule, the NCUA chose to adopt the PAL II rule as a separate provision from the NCUA general lending rule. This places a PAL II under the “safe harbor” provision of the CFPB’s small dollar rule.
PAL I Remains
The NCUA also considered other changes to the structure of the existing PAL I, but rejected those changes. In particular, the NCUA has retained several existing requirements of PAL I, including:
- A member cannot contract more than one PAL at a time and cannot have more than three rolling loans in a period of six months;
- A PAL cannot be “transferred” to another PAL, but a PAL can be extended if the borrower does not have to pay any additional fees or credit, and a payday loan can still be transferred to a PAL; and
- A PAL must fully amortize over the life of the loan – in other words, a PAL cannot contain a lump sum payment feature.
Take away food
The NCUA clearly wants to encourage credit unions to offer PAL options. According to the NCUA, the Dec. 31, 2017 appeal report indicated that approximately 518 federal credit unions offered alternative payday loans, with 190,723 loans outstanding at that time for a total balance of $ 132.4 million. dollars. In comparison, the CFPB cited an analyst’s estimate that in-store and online payday loan volumes were around $ 39.5 billion in 2015.
Additionally, the NCUA is already considering a third alternative – PAL III, noting in the context of the final rule that “[b]before offering a PAL III, the PAL II [notice of proposed rule making] sought to assess industry demand for such a product, as well as solicit feedback on the features and loan structures that should be included in a PAL III. Both of these payday loan alternatives could increase the market for fintech-credit union partnerships to innovate in underwriting and lending in the future, provided credit unions take steps to ensure their fintech partners also comply with federal regulations. The new rule will come into effect 60 days after its publication in the Federal Register.
