The National Credit Union Administration has published a notice in the Federal Register proposing to amend the NCUA’s general lending rule to provide federal credit unions (FCU) with a second option for offering “payday alternative loans” (PALs). Comments on the proposal are due by August 3, 2018.
In 2010, the NCUA amended its general lending rule to allow FCUs to offer PALs as an alternative to other payday loans. For PALs currently allowed under the NCUA rule (PALs I), an FCU can charge an interest rate that is 1000 basis points above the general interest rate set by the NCUA for non-PALs loans, provided the FCU is making a closed-end loan that meets certain conditions. Such conditions include that the loan principal is not less than $200 or more than $1,000, the loan has a minimum term of one month and a maximum term of six months, the FCU does not make more than three PALs in any rolling six-month period to one borrower and not more than one PAL at a time to a borrower, and the FCU requires a minimum length of membership of at least one month.
The proposal is a reaction to NCUA data showing a significant increase in the total dollar amount of outstanding PALs but only a modest increase in the number of FCUs offering PALs. In the proposal’s supplementary information, the NCUA states that it “wants to ensure that all FCUs that are interested in offering PALs loans are able to do so.” Accordingly, the NCUA seeks to increase interest among FCUs in making PALs by giving them the ability to offer PALs with more flexible terms and that would potentially be more profitable (PALs II).
PALs II would not replace PALs I but would be an additional option for FCUs. As proposed, PALs II would incorporate many of the features of PALs I while making four changes:
- The loan could have a maximum principal amount of $2,000 and there would be no minimum amount
- The maximum loan term would be 12 months
- No minimum length of credit union membership would be required
- There would be no restriction on the number of loans an FCU could make to a borrower in a rolling six-month period, but a borrower could only have one outstanding PAL II loan at a time.
In the proposal, the NCUA states that it is considering creating an additional kind of PALs (PALs III) that would have even more flexibility than PALs II. It seeks comment on whether there is demand for such a product as well as what features and loan structures could be included in PALs III. The proposal lists a series of questions regarding a potential PALs III rule on which the NCUA seeks input.
The NCUA’s proposal follows closely on the heels of the bulletin issued by the OCC setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by national banks, federal savings banks, and federal branches and agencies of foreign banks. In issuing the bulletin, the OCC stated that it “encourages banks to offer responsible short-term, small-dollar installment loans, typically two to 12 months in duration with equal amortizing payments, to help meet the credit needs of consumers.”