Community Banks, Credit Unions Join Forces Against CFPB's Payday Plan

WASHINGTON — Community banks and credit unions would be forced to stop making short-term, small-dollar loans if the Consumer Financial Protection Bureau's payday lending proposal is adopted, two trade groups said Monday.

The Independent Community Bankers of America and the Credit Union National Association sent a joint two-page letter to CFPB Director Richard Cordray, explaining why they think the payday plan is unworkable for their constituents.

"The proposed rule, if finalized in its current form, would unquestionably disrupt lending by credit unions and community banks," said the letter, signed by Cam Fine, the president of the ICBA, and Jim Nussle, the president of the credit union group.

The CUNA also sent a separate seven-page letter to Rick Metsger, chairman of the National Credit Union Administration, asking that credit unions be exempt from the CFPB's proposal.

The CFPB created a provision in its payday plan specifically to accommodate credit unions. But the CUNA said additional requirements included in the provision "could subject a credit union to safety and soundness issues."

"It is important to understand that credit unions, who make little or no profit on PAL or other similar loans but usually offer them as a service or courtesy to members, are being asked to voluntarily navigate compliance with a rule that is hundreds of pages long with many complexities," the CUNA said in its separate letter.

Credit unions and banks rarely line up on the same side of an issue, but the ICBA and the CUNA want to ensure that small institutions are allowed to originate small loans to consumers who generally have nowhere else to go, but payday lenders or loan sharks. If small banks and credit unions stop making small dollar loans, millions of people could be forced to get loans from of the very firms the CFPB is trying to target, the trade groups claim.

The CFPB's proposal would encourage lenders to undertake a "full-payment" test to determine if a consumer can afford to repay a loan without reborrowing. The plan does allow an alternative principal payoff option for short-term loans of $500 or less with a term of less than 45 days.

There are also two alternatives for longer-term loans, with the first based on the NCUA's PAL program in which the interest rate is capped at 28% and the application fee is $20 or less. A second option has an all-in rate of 36%, excluding a reasonable origination fee; but a lender's projected default rate cannot exceed 5%, or the lender would be required to refund origination fees.

The CUNA said a default rate of 5% or less would eliminate that alternative option for credit unions, which have default rates much closer to 10% or more.

The ICBA and the CUNA said they wanted to "immediately alert" Cordray about their broader concerns with the proposal. Both trade groups plan to submit detailed comment letters before the deadline of Sept. 14.

Both groups claim that the vast majority of predatory or abusive practices involve payday and installment lenders, not credit unions and community banks. They also allege that the proposal's complexity would make it expensive to comply and would eliminate incentives to innovate.

The CFPB's plan to regulate payday, auto title and certain high-cost installment loans was "a good first step" that nevertheless "would sweep in many consumer-friendly products offered by our members," the joint letter says.

Specifically, the payday plan's underwriting and other requirements are "unnecessarily complex for depository institutions" and are "inconsistent" with how credit unions and community banks underwrite loans.

The two groups also called out Cordray for saying at a public hearing this month that the proposal's intention was not to disrupt existing lenders.

"Small dollar loans provided by credit unions and community banks do not fit into one specific category and subjecting them to a lengthy list of requirements would undoubtedly significantly reduce consumer options for these loan products," the letter says.

The groups claim the proposal would harm consumers and make it difficult for credit unions and community banks to serve those customers.

"Credit unions and community banks are one of the best options for consumers in need of this credit," the letter states. "If credit unions and community banks are regulated out of this market, we are very concerned about the options consumers will be left with, which could include unregulated and unlicensed predatory lenders."