The National Credit Union Administration has published a final rule in the Federal Register that amend the NCUA’s general lending rule to provide federal credit unions (FCU) with a second option for offering “payday alternative loans” (PALs). The final rule is effective December 2, 2019.
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.
In 2018, the NCUA issued a proposal to give FCUs the ability to offer PALs with more flexible terms and that would potentially be more profitable (PALs II). The PALs II authorized by the final rule do not replace PALs I but are an additional option for FCUs. PALs II incorporate many of the features of PALs I while making three changes:
- The loan can have a maximum principal amount of $2,000 and there is no minimum amount
- The maximum loan term is 12 months
- No minimum length of credit union membership is required
An FCU cannot make more than one of any type of PALs loan to a single borrower at a time.
In its proposal, the NCUA stated that it was considering creating an additional kind of PALs (PALs III) that would have even more flexibility than PALs II and sought comment on whether there is demand for such a product as well as what features and loan structures could be included in PALs III. In the final rule’s Supplementary Information, the NCUA states that is has taken the comments regarding PALs III under advisement and will determine whether future action is necessary.