Credit unions send NCUA back to the drawing board on PAL proposal
August 20, 2018 8:00 AM
Alternatives to the PAL alternative
Several months ago, the National Credit Union Administration announced its plans to expand payday alternative loan options for credit unions. The new initiative focuses on creating a second product that credit unions could include in their offerings in addition to existing PAL programs. The proposed rule for Payday Alternative Loans II would involve four key changes:
- Eliminating the minimum loan amount and setting a maximum loan amount at $2,000
- Setting a maximum term of 12 months
- No minimum length of credit union membership required
- No restriction on the number of loans credit unions can make to borrowers in a six-month period (as long as the borrower only has one outstanding loan at a time).
But, with the Consumer Financial Protection Bureau also working on its own payday lending rules, the NCUA sought comment on a potential third PAL option. 46 comment letters were published, ones discussing interest rates, fees, window terms, and maximum offering amounts.
The majority of responding institutions welcomed the changes, but did so with caution and overlapping concerns, with many suggesting that the 28 percent APR could pose a significant barrier to entry. Many also agreed that the loan term and loan amount limits were not substantial because of its brevity. Regarding whether or not a third option should be added, some respondents expressed interest in expanding the number of options available to consumers, though others expressed concern that having too many options available will simply create confusion.
Read on for a sampling of theresponses .
- Eliminating the minimum loan amount and setting a maximum loan amount at $2,000
- Setting a maximum term of 12 months
- No minimum length of credit union membership required
- No restriction on the number of loans credit unions can make to borrowers in a six-month period (as long as the borrower only has one outstanding loan at a time).
But, with the Consumer Financial Protection Bureau also working on its own payday lending rules, the NCUA sought comment on a potential third PAL option. 46 comment letters were published, ones discussing interest rates, fees, window terms, and maximum offering amounts.
The majority of responding institutions welcomed the changes, but did so with caution and overlapping concerns, with many suggesting that the 28 percent APR could pose a significant barrier to entry. Many also agreed that the loan term and loan amount limits were not substantial because of its brevity. Regarding whether or not a third option should be added, some respondents expressed interest in expanding the number of options available to consumers, though others expressed concern that having too many options available will simply create confusion.
Read on for a sampling of the
Cathie Mahon, CEO/president, National Federation of Community Development Credit Unions
"The Federation respectfully challenges the assumptions inherent in the [NCUA] board’s justification for the proposed rule and urges NCUA not to proceed with these changes without more thorough research and input from stakeholders throughout the industry.
- The board does not provide sufficient documentation or analysis that these changes will increase access to responsible credit. In its proposed rulemaking, the board cites data showing an increase in the PALs loans outstanding but only a modest increase in the number of FCUs offering these loans as the rationale for the proposed rule. It fails to provide any data or information that would suggest that the adoption of this rule and PALs II program would significantly expand or grow this lending to consumers. There is little evidence supporting the assumption that this would in any way address the harmful effects of predatory payday lending on consumers. It simply offers a mechanism for credit unions to charge more for credit to those same consumer segments. We urge NCUA to study this market gap more thoroughly and carefully before proceeding.
- The existing PAL product vastly undercounts small-dollar consumer lending from credit unions. Because the PALs program was established as a separate and specific product, NCUA has been undercounting the number and volume of small-dollar loans originated by credit unions. Community development credit unions are already meeting this market need through their traditional consumer lending. Many of these CDCUs have chosen not to offer or report on the specific PAL product for reasons other than pricing, preferring instead to continue to offer small loans as a typically underwritten credit union loan. The success of CDCUs in serving this market well can serve as a guide for the rest of the industry on how to meet the demand for small dollar credit responsibly and sustainably."
- The board does not provide sufficient documentation or analysis that these changes will increase access to responsible credit. In its proposed rulemaking, the board cites data showing an increase in the PALs loans outstanding but only a modest increase in the number of FCUs offering these loans as the rationale for the proposed rule. It fails to provide any data or information that would suggest that the adoption of this rule and PALs II program would significantly expand or grow this lending to consumers. There is little evidence supporting the assumption that this would in any way address the harmful effects of predatory payday lending on consumers. It simply offers a mechanism for credit unions to charge more for credit to those same consumer segments. We urge NCUA to study this market gap more thoroughly and carefully before proceeding.
- The existing PAL product vastly undercounts small-dollar consumer lending from credit unions. Because the PALs program was established as a separate and specific product, NCUA has been undercounting the number and volume of small-dollar loans originated by credit unions. Community development credit unions are already meeting this market need through their traditional consumer lending. Many of these CDCUs have chosen not to offer or report on the specific PAL product for reasons other than pricing, preferring instead to continue to offer small loans as a typically underwritten credit union loan. The success of CDCUs in serving this market well can serve as a guide for the rest of the industry on how to meet the demand for small dollar credit responsibly and sustainably."
Ben Morales, CEO, QCash Financial and chief technology officer at Washington State Employees CU
"QCash Financial would like to offer an alternate suggestion to the NCUA as a formal comment on the most recent NUCA PAL proposal for federal credit unions. It is our belief that these programs, when responsibly marketed, priced and managed can effectively meet the short-term borrowing needs of consumers at an affordable and risk-focused price, while steering vulnerable consumers away from debt traps and providing necessary financial wellness resources. Our recommendation would bring the NCUA PAL program in line with existing regulatory requirements from the DOD and CFPB, and preserve the exemption the PAL program enjoys under the newly issued CFPB payday loan rule. We have seen, first-hand through our clients, the benefit of a thoughtfully designed and tailored program can bring to consumers and credit unions, and we respectfully request adequate consideration to our thoughts below.
As is stands, the PAL program has low adoption and we applaud the board’s attempts to offer additional options to FCUs to enter this space and offer payday alternative loans to meet the short-term liquidity needs of their members. The alternatives contemplated, which if promulgated as proposed will modify loan amounts, terms, frequency, and membership requirements, are a good step forward for America’s FCUs. However, the rule construction is unnecessarily complex. Our recommendations, as outlined herein, shore up what we have observed as problems in the proposed rule and will serve to meet your stated objectives, while enhancing regulatory certainty and bringing parity to the short-term lending industry at large.
Proposed rule language amendments are recommended. Specifically, we recommend editing §701.21(c) as follows:
1. Strike the proposed edits to §701.21(c)(7)(iii) that rename the program PALs I entirely. It is important that the program name not change.
2. Strike the new section under proposal to be added to 12 CFR 701.21 (701.21(c)(7)(iv))for the description of PALs II.
3. Alternatively, revise §701.21(c)(7)(iii) by adding 701.21(c)(7)(iii)(B) and renumbering 701.21(c)(7)(iii)(B) as 701.21(c)(7)(iii)(C). This way it defines a longer term option of a permissible small dollar loan under the overall PAL program section name, instead of being called out and named separately."
As is stands, the PAL program has low adoption and we applaud the board’s attempts to offer additional options to FCUs to enter this space and offer payday alternative loans to meet the short-term liquidity needs of their members. The alternatives contemplated, which if promulgated as proposed will modify loan amounts, terms, frequency, and membership requirements, are a good step forward for America’s FCUs. However, the rule construction is unnecessarily complex. Our recommendations, as outlined herein, shore up what we have observed as problems in the proposed rule and will serve to meet your stated objectives, while enhancing regulatory certainty and bringing parity to the short-term lending industry at large.
Proposed rule language amendments are recommended. Specifically, we recommend editing §701.21(c) as follows:
1. Strike the proposed edits to §701.21(c)(7)(iii) that rename the program PALs I entirely. It is important that the program name not change.
2. Strike the new section under proposal to be added to 12 CFR 701.21 (701.21(c)(7)(iv))for the description of PALs II.
3. Alternatively, revise §701.21(c)(7)(iii) by adding 701.21(c)(7)(iii)(B) and renumbering 701.21(c)(7)(iii)(B) as 701.21(c)(7)(iii)(C). This way it defines a longer term option of a permissible small dollar loan under the overall PAL program section name, instead of being called out and named separately."
Dave Adams, CEO, Michigan Credit Union League
"We recommend the board view a payday alternative lending program holistically and create one unified PAL program to simplify understanding and compliance for credit unions. The unified PAL program should then encompass the available options to federal credit unions. Having multiple options under one program would allow credit unions to provide solutions that reach members who need them most. Below is an example of principles and conditions under which credit unions can structure their own payday alternative loan programs.
NCUA lending principles for payday lending alternative loans:
• All lending products, disclosures and practices comply with applicable laws and regulations;
• Contain underwriting or qualifying criteria based on proof of recurring income or employment;
• Contain or encourage the use of saving features or financial planning/counseling;
• Reports borrower’s repayment history to the credit bureaus.
Should the lending product meet these principles, the credit union will be allowed to charge 1800 basis points over the board-established interest rate cap, provided that the loan meets the following conditions:
1. Loan amount is no more than $4,000;
2. Term is 1 to 36 months;
3. APR does not exceed 36 percent (1800 basis points over rate cap);
4. Application fee does not exceed $50 for closed-end loans;
5. Annual participation fee does not exceed $50 for open-end loans;
6. No more than one loan at a time per borrower;
7. Rollovers are prohibited;
8. Loans amortize fully to a zero balance;
9. Loans repaid in substantially equal installments;
10. Aggregate dollar amount of loans does not exceed 20 percent of net worth. Low-income designated credit unions or those that participate in Community Development Financial Institutions program are exempt."
NCUA lending principles for payday lending alternative loans:
• All lending products, disclosures and practices comply with applicable laws and regulations;
• Contain underwriting or qualifying criteria based on proof of recurring income or employment;
• Contain or encourage the use of saving features or financial planning/counseling;
• Reports borrower’s repayment history to the credit bureaus.
Should the lending product meet these principles, the credit union will be allowed to charge 1800 basis points over the board-established interest rate cap, provided that the loan meets the following conditions:
1. Loan amount is no more than $4,000;
2. Term is 1 to 36 months;
3. APR does not exceed 36 percent (1800 basis points over rate cap);
4. Application fee does not exceed $50 for closed-end loans;
5. Annual participation fee does not exceed $50 for open-end loans;
6. No more than one loan at a time per borrower;
7. Rollovers are prohibited;
8. Loans amortize fully to a zero balance;
9. Loans repaid in substantially equal installments;
10. Aggregate dollar amount of loans does not exceed 20 percent of net worth. Low-income designated credit unions or those that participate in Community Development Financial Institutions program are exempt."
Paul Guttormsson, vice president of legal & compliance, The Wisconsin Credit Union League
"We support any efforts to give consumers meaningful alternatives to unscrupulous payday lenders. They prey on the poorest in our society and those who lack access to other sources of credit, charging usurious interest rates and high fees to trap customers in endless cycles of repeat borrowing. Payday lenders defend their tactics by claiming their rates are reasonable in light of the short terms of their loans. That’s hardly the reality. The payday lenders’ business model relies on borrowers being unable to repay their initial loans.
These loans are routinely targeted at low-income Wisconsinites and people of color, with devastating impacts for already vulnerable communities, according to Wisconsin Public Interest Research Group (WISPIRG).
- The 28 percent interest rate cap is too low and it is out of sync with caps imposed by other federal regulators.
- The $2,000 loan limit is too low and it may not reflect the consumers’ needs
- The $20 application fee cap is too low and it would not allow FCUs to recoup actual costs.
The NCUA has asked whether a future PALs proposal (PALs III) should include an ability-to-repay requirement, similar to that required by the CFPB’s Payday Loan Rule. We don’t believe that credit unions need such a requirement. It would increase origination costs far out of proportion to the risks involved in such relatively small loans. Also, unlike payday lenders, credit unions are more likely to be familiar with their member-owners’ financial histories and abilities to handle the payments on such loans. An ability to repay requirement would be unnecessary and unduly burdensome given the small size of the loans involved."
These loans are routinely targeted at low-income Wisconsinites and people of color, with devastating impacts for already vulnerable communities, according to Wisconsin Public Interest Research Group (WISPIRG).
- The 28 percent interest rate cap is too low and it is out of sync with caps imposed by other federal regulators.
- The $2,000 loan limit is too low and it may not reflect the consumers’ needs
- The $20 application fee cap is too low and it would not allow FCUs to recoup actual costs.
The NCUA has asked whether a future PALs proposal (PALs III) should include an ability-to-repay requirement, similar to that required by the CFPB’s Payday Loan Rule. We don’t believe that credit unions need such a requirement. It would increase origination costs far out of proportion to the risks involved in such relatively small loans. Also, unlike payday lenders, credit unions are more likely to be familiar with their member-owners’ financial histories and abilities to handle the payments on such loans. An ability to repay requirement would be unnecessary and unduly burdensome given the small size of the loans involved."
Todd Mason, CEO/president, Maine CU League
"While we strongly support expanded opportunities for credit unions to provide payday alternative loans, we have concerns about the compliance burdens that the PAL I and PAL II programs pose to credit unions. To increase the overall benefit to credit union members, NCUA should consider the barriers for credit union participation in the PAL programs and provide a cohesive singular rule that would allow credit unions to tailor their program to the needs of their membership.
If NCUA does not go down the path of a single rule that could be tailored for different credit unions, we would like to see more threshold alignment for small dollar lending between agencies with issue overlap. For instance, the thresholds for interest rates the PAL II proposed should be in line with the Department of Defense’s Military Lending Act (MLA) ceiling of 36 percent APR. Credit unions are already expected to comply with numerous competing rules and regulations and new regulations should not add to that burden where possible.
We also recognize that asking for alignment between agencies is not easily done in every instance. For example, the Bureau of Consumer Financial Protection’s payday lending rule addresses similar principles, but involves loans that are much higher risk than those proposed in PAL II. Here, complete alignment would not make sense because it could mean even more compliance burden on credit unions and even more barriers to the industry offering small-dollar, short-term loans.
If more consumers have access to money from a safe and trusted place at a fair and reasonable term, they will be less likely to pursue loans from predatory lenders. That’s not only good news for consumers; it is good news for our credit unions. However, credit unions are under tremendous burden from regulations that disproportionately impact them as small financial institutions. We strongly support a single rule from NCUA that would provide a more cohesive and holistic approach to payday alternative loans and we urge the NCUA to continue its efforts to ensure that credit unions are exempt from duplicative small dollar lending rules imposed by non-NCUA entities."
If NCUA does not go down the path of a single rule that could be tailored for different credit unions, we would like to see more threshold alignment for small dollar lending between agencies with issue overlap. For instance, the thresholds for interest rates the PAL II proposed should be in line with the Department of Defense’s Military Lending Act (MLA) ceiling of 36 percent APR. Credit unions are already expected to comply with numerous competing rules and regulations and new regulations should not add to that burden where possible.
We also recognize that asking for alignment between agencies is not easily done in every instance. For example, the Bureau of Consumer Financial Protection’s payday lending rule addresses similar principles, but involves loans that are much higher risk than those proposed in PAL II. Here, complete alignment would not make sense because it could mean even more compliance burden on credit unions and even more barriers to the industry offering small-dollar, short-term loans.
If more consumers have access to money from a safe and trusted place at a fair and reasonable term, they will be less likely to pursue loans from predatory lenders. That’s not only good news for consumers; it is good news for our credit unions. However, credit unions are under tremendous burden from regulations that disproportionately impact them as small financial institutions. We strongly support a single rule from NCUA that would provide a more cohesive and holistic approach to payday alternative loans and we urge the NCUA to continue its efforts to ensure that credit unions are exempt from duplicative small dollar lending rules imposed by non-NCUA entities."
MarkBolles.com
Bill Mellin, president and CEO of the New York Credit Union Association
"The unfortunate reality is that given the continuing financial struggles faced by millions of Americans, there is a pressing need for responsible, short-term lending options. For example, almost half of the American public would not have enough money to deal with a financial crisis that costs more than $400. Furthermore, traditional payday borrowers “are not, as often assumed, financially illiterate or casual about borrowing under such demanding terms. The reality is that for many of the poor, these loans represent the only access to credit, and they go to them reluctantly.” This trend is not simply limited to poor individuals but is instead an increasingly prominent condition of middle-class existence in America.
Credit unions are well aware of these disturbing developments. Consequently, when the CFPB proposed regulating payday loans so severely that NCUA could no longer have authorized FCUs to make PALs, several credit unions reached out to the association and expressed the importance of allowing them to continue to offer short-term loan alternatives. Fortunately, the CFPB’s final rule did not prohibit PALs. At the same time, it was clear to the Association that credit unions could do even more to help their members if they were given more, not less flexibility.
The overriding goal of any regulatory framework governing short-term loans should be to give consumers as many alternatives to taking out payday loans as possible. Consequently, it never has made sense for NCUA to mandate that PALs should only be made available to persons who are credit union members for at least a month. By giving credit unions that choose to do so the opportunity to provide short-term loans to new members, NCUA is maximizing the chance that persons in need of such emergency financing will have credit unions available as an alternative to traditional payday lenders."
Credit unions are well aware of these disturbing developments. Consequently, when the CFPB proposed regulating payday loans so severely that NCUA could no longer have authorized FCUs to make PALs, several credit unions reached out to the association and expressed the importance of allowing them to continue to offer short-term loan alternatives. Fortunately, the CFPB’s final rule did not prohibit PALs. At the same time, it was clear to the Association that credit unions could do even more to help their members if they were given more, not less flexibility.
The overriding goal of any regulatory framework governing short-term loans should be to give consumers as many alternatives to taking out payday loans as possible. Consequently, it never has made sense for NCUA to mandate that PALs should only be made available to persons who are credit union members for at least a month. By giving credit unions that choose to do so the opportunity to provide short-term loans to new members, NCUA is maximizing the chance that persons in need of such emergency financing will have credit unions available as an alternative to traditional payday lenders."
Nick Bourke, director of consumer finance, Pew Charitable Trusts
"Credit unions can provide liquidity to many consumers who borrow today from non-depository lenders. Credit unions can also be profitable at prices that are typically about six times lower than those in the payday loan market—but not as low as those in NCUA’s PAL program or the FDIC’s 2008 Small-Dollar Loan Pilot program. If NCUA improves the existing PAL program sufficiently to enable credit unions to make safe small loans widely available to members profitably, that would not only enhance the safety and soundness of these institutions, but it could save millions of borrowers billions of dollars. Credit unions and banks are well-positioned to offer small loans. Every single payday loan borrower has a checking account and income, because those are the two requirements to obtain a loan. Three-quarters of auto title loan borrowers are banked. But the volume of bank and credit union small-dollar loans has remained low, and the entire NCUA PAL program has resulted in fewer than 200,000 loans in recent years, compared with roughly 100 million payday loans annually.
The PAL program has not reached scale for three reasons:
1) Lack of automation
2) Insufficient revenue
3) Insufficient flexibility
Pew supports NCUA’s efforts to expand small-loan programs so credit union members can access them, but the apparent focus on showing an artificially low TILA APR means that programs will be structured in a way that overly relies on front-loaded fees and causes some consumers to pay too little to sustain the program and others to pay too much."
The PAL program has not reached scale for three reasons:
1) Lack of automation
2) Insufficient revenue
3) Insufficient flexibility
Pew supports NCUA’s efforts to expand small-loan programs so credit union members can access them, but the apparent focus on showing an artificially low TILA APR means that programs will be structured in a way that overly relies on front-loaded fees and causes some consumers to pay too little to sustain the program and others to pay too much."
Robert Rogers
Steven Bradley, professor, Hankamer School of Business at Baylor University
"I urge NCUA to focus less on achieving a specific APR and instead on giving credit unions a way to create a better option for those who use high-cost loans today. I reside in Texas, where payday lenders often charge $800-$1,300 in fees to borrow $500 for six months. Surely credit unions don’t need to charge anywhere near that much, but just as surely, if they could be profitable making that loan for the $62 in gross revenue permitted by the current PAL program, they would do so.
Therefore, I urge NCUA to allow higher prices than the current 28 percent interest plus a $20 application fee. As an example, the Pew Charitable Trusts has proposed an 18 percent interest rate plus a monthly service fee up to $20. Such pricing would result in mid- to high double-digit APRs, but it would also represent billions of dollars in annual savings if it displaced even a small share of the high-cost loan market. It would also allow more revenue for credit unions to invest in the technology needed to automate much of the lending process, bringing down costs in the long term.
I would also urge NCUA to allow credit unions to offer a line of credit option. For consumers with volatile incomes and expenses, a line of credit could easily be a better choice than a closed-end loan that has less flexibility. The prohibition on such flexible products under the current PAL program does a disservice to those households who see their incomes or expenses drop one month and spike the next."
Therefore, I urge NCUA to allow higher prices than the current 28 percent interest plus a $20 application fee. As an example, the Pew Charitable Trusts has proposed an 18 percent interest rate plus a monthly service fee up to $20. Such pricing would result in mid- to high double-digit APRs, but it would also represent billions of dollars in annual savings if it displaced even a small share of the high-cost loan market. It would also allow more revenue for credit unions to invest in the technology needed to automate much of the lending process, bringing down costs in the long term.
I would also urge NCUA to allow credit unions to offer a line of credit option. For consumers with volatile incomes and expenses, a line of credit could easily be a better choice than a closed-end loan that has less flexibility. The prohibition on such flexible products under the current PAL program does a disservice to those households who see their incomes or expenses drop one month and spike the next."
R.J. Lehmann (L), director of finance, insurance and trade policy, and Alan Smith (R), midwest director and senior fellow, R Street Institute
"We would urge symmetry with the U.S. Defense Department's Military Lending Act program, the Bureau of Consumer Financial Protection rules and the Federal Deposit Insurance Corp.'s small-dollar pilot loan program, all of which have settled on a 36 percent annual percentage rate ceiling for small-dollar loan instruments. Given compliance and entry costs, we believe this rate, and not the NCUA's proposed 28 percent, would better allow credit unions to maximize their ability to serve this market.
To grant credit unions needed flexibility to construct and pricing small-dollar-loan programs, we also believe the maximum application fee should be increased to $50. Moreover, the $2,000 loan limit would only partially satisfy common situations in which credit union members might need emergency short-term loans, such as vehicle breakdowns and emergency medical expenses. We would propose the rules be adjusted to permit higher dollar thresholds and longer maturities.
Finally, we reiterate the need for harmony and alignment among the federal lending regulators. NCUA monitoring of credit unions’ lending programs should remain exempt from duplicative oversight by the Bureau of Consumer Financial Protection and other agencies that might seeking to regulate nonbank loans. Specifically, we believe the safe harbor exemption for credit unions that make loans in compliance with 12 CFR 701.21(c)(7)(iii), should be extended to PAL II programs."
To grant credit unions needed flexibility to construct and pricing small-dollar-loan programs, we also believe the maximum application fee should be increased to $50. Moreover, the $2,000 loan limit would only partially satisfy common situations in which credit union members might need emergency short-term loans, such as vehicle breakdowns and emergency medical expenses. We would propose the rules be adjusted to permit higher dollar thresholds and longer maturities.
Finally, we reiterate the need for harmony and alignment among the federal lending regulators. NCUA monitoring of credit unions’ lending programs should remain exempt from duplicative oversight by the Bureau of Consumer Financial Protection and other agencies that might seeking to regulate nonbank loans. Specifically, we believe the safe harbor exemption for credit unions that make loans in compliance with 12 CFR 701.21(c)(7)(iii), should be extended to PAL II programs."
