The CFPB's Final Payday Rule: The PAL Exemption

Written by Jennifer Aguilar, Regulatory Compliance Counsel

On October 5, the CFPB announced it had finalized its rule on payday loans. The final rule seeks to provide "common-sense protections" for payday loans, auto title loans, deposit advance products and certain other longer term loans with balloon payments. A key protection under the new rule is that lenders will be required to conduct an ability-to-repay analysis to determine whether the borrower can repay the full amount of the loan without re-borrowing. The final rule also imposes requirements concerning withdrawal practices, disclosures and recordkeeping. The final rule covers a number of different types of loans, but the rule also provides a number of exclusions and exemptions, one of which is of particular importance for credit unions – the PAL exemption.

New section 1041.3(e) exempts "alternative loans" from the payday rule. In the preamble, the CFPB explains that this exemption applies to any loan that meets the conditions outlined in the final rule so that any lender, not just federal credit unions, may qualify for this exemption. The CFPB found that this was the best approach to ensure the rules are applied consistently to all lenders. In order to qualify as an "alternative loan," the loan must meet all of the following conditions:

1. Loan terms: the loan must not be structured as open-end credit; have a term between one and six months; have a principal between $200 - $1,000; be repayable in two or more equal payments due in equal intervals; completely amortize during the term; and no charges may be imposed other than the rate and application fees permissible under 12 C.F.R. 701.21(c)(7)(iii).
2. Borrowing history: the lender must determine that, if the lender made this loan, the borrower would not be indebted on more than three alternative loans within a 180-day period; the lender may make only one alternative loan at a time to a consumer.
3. Income documentation: the lender must have and must comply with policies and procedures for documenting proof of recurring income.

Any loan that meets all these conditions is an "alternative loan" and is exempt from the payday rule. Section 1041.3(e) goes on to provide a safe harbor for federal credit unions. The safe harbor states that any loan made in compliance with NCUA's PAL program is an "alternative loan" for purposes of the payday rule. This means that a federal credit union does not have to separately meet the conditions above for its PALs in order for that loan to be exempt from the payday rule – as long as it’s a PAL, it’s an alternative loan.

So, now that we know all PALs are alternative loans, the next question is . . . What’s a PAL? Section 707.21(c)(7)(iii) lays out the specific requirements that must be met in order for a loan to qualify as a PAL. According to the rule, all the following conditions must be met:

1. The loan must be closed end, have a principal balance between $200 - $1,000, have a maturity between one – six months, and be fully amortizing;
2. The FCU must not make more than three PALs in any rolling six-month period to any one borrower, make more than one PAL at a time to a borrower, nor roll over any PAL;
3. The borrower must be a member of the FCU for at least one month;
4. Any application fee must be charged to all members, must reflect the actual cost of processing the application, and must not exceed $20; and
5. The FCU has a written lending policy that imposes an aggregate dollar limit for PALs of a maximum of 20% of net worth and implements underwriting guidelines to minimize the risks associated with PALs.

In addition to meeting the payday rule's safe harbor for alternative loans, PALs also qualify for a higher interest rate. The rule permits credit union to charge an interest rate of 1000 basis points above the maximum interest rate set by NCUA.