Credit union agency proposes additional payday loan products; looking for ‘safe harbor’

The federal regulator of credit unions is proposing a second payday loan option – and perhaps even a third – that it hopes will lead to a “safe harbor” from the federal consumer financial protection agency from its rules on the loan products.

In a unanimous vote, the two-member National Credit Union Administration (NCUA) Board voted to issue a notice of proposed rulemaking for a second payday loan product (typically defined as a small dollar, short-term loan product) for federal credit unions that would be distinct, the agency said, from an existing product now allowed under agency rules. The notice was issued with a 60-day comment period.

“This product would have features to help federal credit unions meet specific needs of certain payday loan borrowers that are not met by the current program and provide those borrowers with a safer, less expensive alternative to traditional payday loans,” the agency said in a release.

Called “PALs II,” (for “Payday Alternative Loans II”), the agency said it would include features of its current payday loan rules (PALs), but with four changes:

  • Sets the maximum loan amount at $2,000 and eliminates the minimum loan amount.
  • Sets the maximum term of the loan at 12 months.
  • Does not require a minimum length of credit union membership.
  • Does not include time a restriction on the number of loans a federal credit union may make to the borrower in a six-month period, provided the borrower has only one outstanding loan at a time.

In issuing the notice, the board members said they were also seeking comment on a possible third loan option; they asked for opinions on interest rates, maximum loan amounts, terms and application fees.

In issuing the notice, the board members noted the complicated nature of the proposals – and particularly that any payday loan product it issues must be compliant with rules established by the Bureau of Consumer Financial Protection (BCFP, formerly known as the CFPB).

“The PALs program, in order for it to be implemented by credit unions, has to be CFPB compliant,” NCUA Board Chairman J. Mark McWatters said to staff presenting the proposal. “So, from what you’re telling me, there are a couple of items in PALs that credit unions can adopt immediately, it sounds like – and that would fall within a CFPB exemption,” McWatters said.

However, McWatters pointed out that a “safe harbor” will be needed for the new, proposed alternatives (if adopted) to reduce the level of compliance for credit unions. To obtain that safe harbor (“grandfathering” the new proposals within the CFPB rules), McWatters recommended that he and NCUA Board Member Rick Metsger jointly sign a letter to BCFP Acting Director Mick Mulvaney, urging him to grant the “safe harbor.”

“I know that when Mr. Metsger was chair of NCUA, he wrote a letter to the (CFPB) director asking that PALsI be grandfathered or put within what we call a safe harbor,” McWatters said. “When I became chair, I did the same thing. I would propose that we continue that approach, writing to Director Mulvaney – or whoever the director is – and asking that PALsII and PALsIII, as they are developed, are also within a safe harbor.

“In fact, I would suggest that we write a joint letter, if you are amendable to that,” McWatters said, nodding at Metsger, “asking for that safe harbor treatment, because that would make it much easier for credit unions to comply.”

Metsger pointed out that the proposal of two, additional payday loan alternatives presents a complicated scenario, telling the audience at the meeting that they were witnessing “the sausage being made” of regulatory action. However, he also suggested that, as the process continues, the two additional loan proposals could be folded into the existing PALs program “so that there is one package that credit unions may look at, in order to provide short-term dollar loans to their members.”

In other comments, McWatters acknowledged a payday loan proposal made this week by the Office of the Comptroller of the Currency (OCC). “The OCC seems to want to have a similar product (as the PALsI of NCUA),” McWatters said. “I commend and thank very much Comptroller (Joseph) Otting for moving in this approach. It seems like there should be payday alternative programs for federally insured financial institutions,” he said.

Notice of Proposed Rulemaking, Part 701, Payday Alternative Loans