At the September open meeting, the National Credit Union Administration (NCUA) voted 2-1 to approve the final rule related to expanding payday alternative loan options (PAL II). Although the NCUA made clear in the final rule that the PAL II does not replace the PAL I, the flexibility of the PAL II will create new opportunities for borrowers to refinance their payday loans or other debt obligations under the PAL II lending model. Importantly, though, credit unions may only offer one type of PAL to a borrower at any given time.
The key differences between PAL I and PAL II are as follows:
|Loan Type||PAL I||PAL II|
1 Month Minimum;
6 Month Maximum
1 Month Minimum;
12 Month Maximum
|Membership Requirement||Must be a member of Credit Union for 1 month before obtaining loan||No membership time requirement|
|Overdraft or Non-sufficient Funds (NSF) Fees||No Restrictions||Cannot charge overdraft or NSF fees|
Based on the NCUA’s discussion of the comments that it received, one of the hottest issues was the interest rate for the PAL II. For PAL I, the maximum interest rate is 28% inclusive of finance charges. The NCUA indicated that “many commenters” requested an increase in the maximum interest rate to 36%, while consumer groups pushed for a decreased interest rate of 18%. Ultimately, the NCUA elected to keep the interest rate at 28% for PAL II, explaining that, unlike the CFPB’s rule and the Military Lending Act, the NCUA allows collection of a $20 application fee.
PAL Volume Restrictions
The NCUA also discussed the current limitation that the total amount of a credit union’s PAL I loan balances cannot exceed 20% of the credit union’s net worth. The final rule makes clear that a credit union’s combined PAL I and PAL II loan balances cannot exceed 20% of the credit union’s net worth. This limitation faced criticism from those seeking an exemption for low-income credit unions and credit unions designated as community development financial institutions where payday loans may be more pervasive in the surrounding community. The NCUA declined to consider the net worth cap since it was outside the scope of the rule-making notice, but the NCUA indicated that it would revisit those comments in the future if appropriate. Of course, in light of the OCC recently taking comments on modernizing the Community Reinvestment Act (CRA), the NCUA will likely revisit lending issues for low-income credit unions.
CFPB Small Dollar Rule Implications
Finally, in response to several commenters, the NCUA made clear the impact of the CFPB’s Small Dollar Rule on PAL II. As covered in our two-part webinar, the CFPB’s Small Dollar Rule imposes significant changes to consumer lending practices. However, because of the “regulatory landscape” related to the CFPB’s Small Dollar Rule, the NCUA has opted to adopt the PAL II rule as a separate provision of the NCUA’s general lending rule. This places a PAL II under the “safe harbor” provision of the CFPB’s Small Dollar Rule.
PAL I Remnants
The NCUA also considered other changes to the structure of the existing PAL I but rejected those changes. In particular, NCUA retained several existing requirements from PAL I, including, among others:
- A member cannot take out more than one PAL at a time and cannot have more than three rolling loans in a six-month period;
- A PAL cannot be “rolled over” into another PAL, but a PAL can be extended if the borrower is not charged fees or extended additional credit, and a payday loan may still be rolled over into a PAL; and
- A PAL must fully amortize over the life of the loan — in other words, a PAL cannot contain a balloon payment feature.
The NCUA clearly wants to encourage credit unions to offer PAL options. According to the NCUA, the December 31, 2017, call report indicated that approximately 518 federal credit unions offered payday alternative loans, with 190,723 outstanding loans at that time having an aggregate balance of $132.4 million. In comparison, the CFPB has cited an analyst’s estimate that storefront and online payday loan volumes were approximately $39.5 billion in 2015.
Further, the NCUA is already considering a third alternative – the PAL III, noting in the final rule background that “[b]efore proposing a PAL III, the PAL II [notice of proposed rule making] sought to gauge industry demand for such a product, as well as solicit comment on what features and loan structures should be included in a PAL III.” These two payday loan alternatives could increase the market for Fintech-credit union partnerships to innovate underwriting and lending moving forward, provided credit unions take steps to ensure their Fintech partners are also in compliance with federal regulations. The new rule will become effective 60 days after publication in the Federal Register.