The National Credit Union Administration (NCUA) voted 2-1 Thursday to finalize its final rule on payday alternative loans (PALs). Products covered by the rule are intended to provide a better option to consumers in need of short-term, small-dollar loans compared to traditional payday loans.
Rather than replacing existing PAL products, the PAL II final rule enables federal credit unions to offer additional short-term, small-dollar options. The final rule will:
- Allow a federal credit union to offer a PAL II loan up to $2,000;
- Require PALs II loans to have a minimum term of one month with a maximum of 12 months (PALs are limited to six months);
- Allow a federal credit union to make a PALs II loan immediately upon the borrower’s establishing membership;
- Restrict a federal credit union to offering only one type of PALs to a member at any given time;
- Prohibit a federal credit union from charging any overdraft or nonsufficient funds fees in connection with any PAL II payment drawn against a borrower’s account.
“The PALs II rule is a free-market solution that responds to the need for small-dollar lending in the marketplace,” NCUA Chairman Rodney Hood said in a statement. “This can make a difference by helping borrowers build or repair credit records, allowing them to graduate to other mainstream financial products. We want to encourage responsible lending that allows consumers to address immediate needs while working towards fuller financial inclusion. Particularly when coupled with financial counseling, as many credit unions provide, such lending can be a powerful tool to help people get out of debt and climb the ladder toward financial security. This is an example of the fundamental credit union principle of people helping people.”
NCUA board member Todd Harper cast the lone dissenting vote against the proposal, calling the $2,000 loan limit “a bridge too far for me to climb,” according to a report by the Credit Union Times.
“For American consumers who encounter unexpected expenses, meeting immediate financial needs can be difficult,” Credit Union National Association (CUNA) Chief Advocacy Officer Ryan Donovan said in a statement. “Credit unions offer safe and affordable short-term loans to their members and we thank the NCUA board for creating an additional payday alternative loan option.”
Credit union advocates have raised concerns previously that the Consumer Financial Protection Bureau’s (CFPB) payday lending rule would have a negative impact in relation to PALs. The original rule provided an exemption to the CFPB’s standards for credit unions that followed NCUA’s PAL standards, but did not have language concerning the PAL II standards which were being proposed.
The National Association of Federally-Insured Credit Unions (NAFCU) highlighted those concerns in a letter to the CFPB in May, urging the agency to exempt all PALs from coverage under the bureau’s payday rule.
“NAFCU recommends the bureau tailor regulations to include consumer protections from traditional, high-cost lenders,” NAFCU Regulatory Affairs Counsel Kaley Schafer wrote. “Above all else, NAFCU recommends that the bureau expand the safe harbor exemption to include all future iterations of the National Credit Union Administration’s (NCUA) payday alternative loan (PAL) program to afford credit unions the opportunity to offer additional safe and affordable loans.”
She further contended, “Regulations should be tailored to eradicate bad actors in the market without inhibiting credit unions from providing safe and affordable loans.”
Schafer also noted that NAFCU generally is supportive of the CFPB’s proposal to rescind the payday rule’s mandatory ability-to-repay (ATR) underwriting requirements, explaining that such a move would afford credit unions flexibility in underwriting. She also noted that NAFCU believes the CFPB should tailor regulations to protect consumers against the egregious practices by bad actors in the payday lending industry, while also encouraging responsible lenders to offer additional short-term, small-dollar loans. The CFPB delayed the proposal to rescind the rule’s ATR provisions in June.
The PALs II final rule will become effective 60 days following its publication in the Federal Register.