New regulations from the Department of Defense and CFPB could imperil credit unions' efforts to offer reasonably priced, small dollar loans to service members, NCUA Board Chairman Debbie Matz warned.
Matz spoke at a May 5 meeting held by the Defense Credit Union Council's Overseas Subcouncil in Dublin, Ireland.
"Proposals from two federal agencies could require credit unions to make major changes in their loan programs," Matz told the attendees. "The NCUA supports the intent of proposals from the Defense Department and the Consumer Financial Protection Bureau to protect consumers from predatory lending, but we are working to ensure those rules avoid unintended consequences of outlawing access to affordable credit union loans."
The DOD's proposed regulation would cap small dollar loans to military personnel at an annual percentage rate of 36% and include fees in that calculation. By itself, the 36% cap is not new, but including fees in the calculation would force many credit unions' small dollar loans over the limit, Matz said.
"We have done the math and found that when fees are included, many credit unions' short-term loans would exceed the proposed 36% military APR limit," Matz said. "Unfortunately, this proposed rule would deny access to affordable alternatives to predatory payday loans."
In 2010, the NCUA established a regulatory framework for payday-alternative loans. These loans allow federal credit unions to charge an APR up to 28% and an application fee of no more than $20 to cover the processing cost. Today, more than 500 federal credit unions offer payday-alternative loans, including several military-related credit unions.
The average payday-alternative loan balance is $630 with a median interest rate of 24.6%. And the average total cost for a 30-day payday alternative loan is $33. However, the Defense Department's proposed rule would ban such loans for military members and their families.
"We are asking the Defense Department to modify its proposal to prevent the unintended consequence of outlawing affordable credit union loans to the very service members the NCUA's rule was intended to protect," Matz said.
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