Federally chartered credit unions will be permitted to provide their members “payday alternative loans” (PALs) of any amount up to $2,000, fully amortized over a term of one to 12 months, under a final rule approved Thursday on a 2-1 vote by the National Credit Union Administration (NCUA) Board, with Board Member Todd Harper dissenting
The final rule, to take effect 60 days after its publication in the Federal Register, creates a “PALs II” option that will reside alongside the current PALs I framework. (Under PALs 1, a payday-alternative (small-dollar, short-term) loan can be from $200 to $1,000 and can have a term from one to six months.) The final rule also bars charging any overdraft or non-sufficient funds (NSF) fees in connection with any PALs II loan payment drawn against a borrower’s account.
In its May 2018 proposed rule, the agency said allowing a higher loan amount under the PALs framework would give a federal credit union (FCU) a way to meet increased demand for higher loan amounts from payday loan borrowers and and give some borrowers an opportunity to consolidate multiple payday loans into one PALs II loan. “The Board was particularly interested in allowing a sufficient loan amount to encourage borrowers to consolidate payday loans into PALs II loans to create a pathway to mainstream financial products and services offered by credit unions,” the agency noted in Thursday’s final rule summary.
The final rule results in two PALs frameworks even though many commenters preferred to see them combined into one. NCUA said this preserves the safe harbor that PALs I loans enjoy under the Consumer Financial Protection Bureau (CFPB) short-term, small-dollar loan regulation, which is currently under revision.
That said, the PALs II framework is subject to several of the same regulatory provisions that are applied to PALs I. The interest-rate cap – 1,000 basis points above the federal credit union loan rate ceiling, now set at 18% (making an effective cap of 28%) – is one of them. Other shared requirements include:
- a cap of $20 on any loan application fee (the fee should only recoup processing cost);
- full amortization over the loan term;
- a prohibition against making more than three loans to a single borrower within a rolling six-month period (the proposed rule had contemplated removing this for PALs II);
- a requirement that only one PALs loan be provided to the member at any given time; and
- a prohibition against rollovers.
The board was largely divided over the higher loan cap and removal of any minimum under PALs II. Board Member Todd Harper, noting the exorbitant APR that could apply to smaller loans under the program, and citing concern that the higher loan limit would be harmful to borrowers already under financial pressure, voted against issuing the final rule. Both board Chairman Rodney Hood and Member J. Mark McWatters supported the changes, underscoring, among other things, that federal credit unions have numerous options besides a PALs loan to offer to a member needing a small loan to handle an emergency.
Hood called the final rule “a free-market solution that responds to the need for small-dollar lending in the marketplace.” He added, “This can make a difference by helping borrowers build or repair credit records, allowing them to graduate to other mainstream financial products.”
While comments were sought on a potential PALs III, the board “has taken the comments regarding a PALs III loan under advisement and will determine whether future action is necessary,” according to the notice of final rule.
In other action Thursday, the board unanimously approved final rules that revise the agency’s regulations on supervisory committee audits and the the federal credit union bylaws, both effective 90 days after publication in the Register. It also heard a report on the share insurance fund.