The CFPB estimated that in 2015, more than 700 federal credit unions offered PALs. Their originations totaled $123.3 million, representing a 7.2% increase since 2014.

"The loans currently offered by federal credit unions appear to be substantially safer with regard to risk of default, reborrowing and collateral harms from unaffordable payments than many alternative products on the market today," the CFPB said.

Still, credit unions expressed concern over the CFPB's plan.

"The sheer enormity … just leads to confusion," Ben Morales, CEO of QCash, which markets short-term loan products to credit unions, said. "That's just going to scare people off."

He added, however, that while the complexity of the rules is daunting, he believes QCash will be able to continue marketing its loans.

"We've got to understand what is in and what is out," he said. "I still think we can make it work. I think we have a solution that is viable."

The problem, according to Keith Sultemeier, president of the $4 billion Kinecta Federal Credit Union in Manhattan Beach, Calif., is that credit unions do not necessarily make money when they offer PALs. In a testimony at the field hearing, he said his credit union lost money on every PAL made.

Sultemeier said making a profit on small, short-term loans has been a challenge, noting his credit union is a not-for-profit, not a charity.

After reviewing the CFPB proposal, Hank Hubbard, president/CEO of the $33 million One Detroit Credit Union, said he does not think it will affect the product his credit union offers.

"It does not appear to prohibit our product the way it is currently designed," he said. "Ours is a line of credit for $500 with an annual fee of $70 and 18% APR. Draws are for $500 only and must be repaid in two months."

He said his credit union designed its short-term loan to help members avoid the so-called debt trap that the CFPB is concerned about.

However, he added he is concerned the rules could discourage responsible lenders from offering alternatives.

"These rules may place even more – real or perceived – roadblocks to more responsible lenders trying to address the very obvious demand," he said. "I worry that it could make unregulated or illegal alternatives even more prevalent. Those are even more toxic than what we have now."

Credit union industry officials heralded the PAL exemption but tempered their praise with other worries.

"Credit unions exist to meet the needs of their members," CUNA President/CEO Jim Nussle said. "Credit unions are proud of how they have engaged their members with short-term, small-dollar lending needs."

CUNA said the proposal would allow a credit union member to receive up to six PALs a year—up from the four loans the agency originally proposed.

The proposal also includes new requirements for income verification and contains several other modifications to the PAL program, CUNA said. Those include a minimum change to terms from 30 days to 45 days, limitations on payment transfers, amortization requirements and a debt collection requirement, the association said.

Likewise, NAFCU officials expressed concerns about the proposal.

"While we are grateful for the recognition of the NCUA's [PALs]program, we remain extremely concerned about the proposal's effect on credit unions' ability to exercise statutory liens as defined by the Federal Credit Union Act," NAFCU President/CEO Dan Berger said.

The association representing payday lenders reacted to the proposal as many expected.

"In the best interest of consumers, the bureau should have determined the true impact of payday loans on consumer welfare," Community Financial Services Association CEO Dennis Shaul said. "Instead, the bureau has prescribed a rule that fits its pre-determined conclusions and will actually harm consumers' financial well-being."

One consumer advocate noted the rules are not sufficiently strong.

"As currently written, the rule contains significant loopholes that leave borrowers at risk, including exceptions for certain loans from the ability to repay requirement, and inadequate protections against loan flipping – putting borrowers into one unaffordable loan after another," Center for Responsible Lending President Mike Calhoun said. "The rule's ability to repay test provides an exception for about six short-term payday loans annually. That's six too many. Even one unaffordable loan – much less six – can cause significant harm to borrowers, impacting their ability to manage other expenses and keep their bank account in good standing."

Members of Congress were also sharply divided on the issue. House Financial Services Chairman Jeb Hensarling (R-Texas), a critic of the CFPB, condemned the rules and Cordray in particular.

"Accountable to no one, he alone decides for all Americans whether they can take out a small-dollar loan to meet emergency needs," he said, adding that states already regulate small-dollar lenders.

However, Rep. Maxine Waters (D-Calif.), the ranking Democrat on the committee, said the regulation of payday lenders is long overdue.

"Dodd-Frank gave the CFPB the authority to regulate non-bank lenders to even the playing field for lenders and protect consumers from abusive, unregulated credit products," she said. "The CFPB's requirement that lenders collect and share loan data will allow the CFPB and consumer advocates to assess what additional steps need to be taken to protect borrowers."