Written by Brandy Bruyere, Regulatory Compliance Counsel
Happy Monday, today’s blog is a high-level overview of recent developments in the area of payday lending. On March 26th, 2015 the Consumer Financial Protection Bureau (CFPB) formally announced that it is considering rules that would impact payday loans and certain vehicle title loans. Note—this was not a proposed rule, but rather an indication of where the CFPB may go with future rulemaking.
Generally, the bureau is looking at regulating two kinds of “covered loans”—those with a maturity of 45 days or less as well as longer-term loans that have an “all-in” APR that exceeds 36%. These longer-term loans would be “covered loans” if the lender is either repaid via some kind of authorization to access the borrower’s deposit accounts, or the loan is structured as a vehicle title loan.
For both types of covered loans, the CFPB is considering requiring lenders to follow one of two basic sets of rules. First, “debt trap prevention requirements” that would focus on things like determining the borrower’s ability to repay the loan. Alternatively, the bureau is considering proposals focused on “debt trap protection requirements” which would aim to prevent borrowers from ending up in an “unaffordable, long-term cycle of debt” by limiting rollovers during set timeframes (i.e. six or twelve months) and structuring loans so they amortize. The CFPB is also looking at including 60 day “cooling off” periods between loans. These requirements differ for short term versus longer-term loans, for more details on the specifics, check out this CFPB press release and fact sheet.
So the question is how will this process potentially impact credit unions?
NCUA “PAL” Program
NCUA has its “Payday Alterative Loans” or “PAL loans” (formerly called “short term small dollar amount” or “STS” loans). Under section 701.21(c)(7)(iii), federal credit unions [FCUs] may offer loans with interest rates 10% above NCUA’s usury cap, meaning up to 28%, for loans of at least $200 but no more than $1000 so long as the loan meets several requirements:
- The loan term is at least one month but no more than six months;
- The FCU makes no more than three PAL loans in any rolling six month period to a member;
- The FCU only makes one PAL loan to a member at a time;
- The loan is fully amortized;
- The member has been a member for a least one month;
- Applicants are charged an application fee reflecting processing costs at a maximum of $20; and
- The credit union develops underwriting guidelines to minimize risk and limit this kind of loan to no more than 20% of the credit union’s net worth.
Thus, some PAL loans could fall under the proposals the CFPB is considering. The bureau actually discussed impact on FCUs specifically in its outline.
Impact on Federal Credit Unions According to the CFPB
As one possible option for regulating loans with terms above 45 days, the CFPB indicated that loans may be acceptable if they somewhat follow NCUA’s PAL program. However, unlike the other covered loans, PAL loans may be limited to one rollover instead of two. Here is an excerpt from the outline on p. 48:
“Specific impacts on small entities making longer-term loans
The proposals under consideration would impose several requirements on [FCUs] that currently offer [PALs]. [FCUs] would be required to access commercially available reporting systems and report covered loans to those systems…Lenders would also not be able to make these loans to consumers who have a covered loan outstanding. The Bureau seeks information on how often this would limit [FCUs’] ability to make these loans. The NCUA [PAL] program allows [FCUs] to make up to three loans in a six-month period and allows loans that are at least 30 days in length. The proposals under consideration would limit lenders to two loans in a six-month period and require that loans be at least 45 days in length…The restriction on the number of loans in a six-month period could have an impact on the revenue of [FCUs] that make these loans; the Bureau believes these impacts would not be substantial.” (Emphasis added).
This seems to indicate that FCUs would not be able to utilize the “short term loan” options for loans with terms under 45 days, but rather the CFPB would seek changes to the existing PAL program. It is not clear why PAL loans, with their lower 28% usury cap, would be targeted for having one rollover less than what the CFPB may permit for other loans, but frankly this outline is not the model of clarity.
In addition to regulating the loan products themselves, the CFPB is also considering regulations relating to certain automatic payment features, credit unions would be required to provide three business days’ notice before drafting a payment from a member’s account or prepaid product. NAFCU will monitor the CFPB’s activity in this area as the bureau moves forward in its rulemaking process.
Palate Cleanser. This was rather long for a Monday, so here’s a photo of a very little boy and his very giant dog!