A proposed regulation from the Department of Defense that would broaden the types of loans covered by the Military Lending Act could affect credit union lending.

Under fire in the proposal were payday alternative loans as currently allowed by the NCUA, some of which would be off limits to military service members and their families. Some credit card programs and overdraft protection loans would also fall afoul of the new rules.

"Before finalizing NCUA's payday lending alternative rule, we specifically considered how NCUA's rule would fit with existing Defense Department regulations and determined that they were in sync." NCUA Board Chairman Debbie Matz said in a statement. "However, the Defense Department's new proposed rule would broaden the definition of 'consumer credit' under Military Lending Act regulations in a way that would prevent federal credit unions from making payday alternative loans permitted by our rule."

Current NCUA regulations allow federal credit unions to offer payday alternative loans with an interest rate of up to 28% and an application fee of up to $20. Under the MLA, consumer credit to covered borrowers is subject to a 36% cap on the military APR, which includes application fees. If these regulations are revised to cover payday alternative loans, the NCUA said, the rate and fee for many payday alternative loans would be higher than the military APR cap.

About 500 federal credit unions offer payday alternative loans, the NCUA said. They hold about $23 million in outstanding loans, with an average loan balance of $382. The NCUA added that some of these payday alternatives include a savings component and access to financial literacy programs.

The proposed rule would also add credit cards and overdraft lines of credit. As with payday alternative loans, the combined interest rates and fees for these products could exceed the 36% military APR cap, even if the interest rate is below the general 18% interest rate cap for federal credit unions, the NCUA said. The proposed rule did, however, exempt residential mortgage loans and most auto loans.

The proposal would update regulations the DOD put into place in 2007 to implement the MLA. The MLA capped the annual interest rate lenders can charge members of the military to no more than 36%. However, in its regulations, DOD defined those products very specifically, to include only closed-end payday loans for no more than $2,000 and with a term of no more than 91 days, closed-end auto title loans with a term of 181 days or fewer, and closed-end tax refund anticipation loans.

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