All Sides Slam NCUA’s PAL Proposal

There’s a great deal to dislike about the NCUA’s proposed Payday Alternative Loan option, if comments filed with the agency are any indication.

For instance, consumer groups said the allowable interest of 28% is too high for borrowers in a financial crisis.

But for credit union groups, that same interest rate is too low for credit unions to be able to operate the program without taking a loss on the loans.

The reactions came in comments about a new proposal that would supplement but not replace the existing PAL program. The NCUA has been seeking comment on the proposal, since few credit unions have said they can afford to offer loans under the current PAL program.

The new program would increase the maximum loan amount to $2,000, increase the maximum loan term to 12 months, require no minimum length of membership to obtain loans and eliminate the provision that allows a federal credit union to make only three loans to a member in a six-month period.

Agency officials have said they hope the CFPB will provide a “safe harbor” from the agency’s payday loan rules.

The consumer groups, including Americans for Financial Reform and the NAACP, said they strongly oppose allowing the imposition of more than six application fees in 12 months, the interest rate of 28% and the proposal to drop the minimum loan size.

The groups also included the National Federation of Community Development Credit Unions.

Cathie Mahon, president/CEO of the community development credit union group, was blunter in a separate filing, contending that a looser PAL program would blur the differences between credit unions and predatory payday lenders.

“By creating products modeled on the payday lending industry, we are slowly eroding the strong brand equity of credit unions, reducing our ability to justify the many benefits of being socially responsible institutions,” she said.

Mahon said she did not see any benefit to borrowers under the proposal.

“It simply offers a mechanism for credit unions to charge more for credit to those same consumer segments,” she said, adding, “Loans that do not take into account a borrower’s ability to repay are irresponsible and harmful.”

But the 28% interest rate is not too high, according to Monique Michel, CUNA’s senior director of advocacy and counsel. In fact, she said, it’s too low. In her comment on the proposal, Michel noted the CFPB and other financial regulators allow a maximum interest rate of 36%.

Ben Morales, CEO of QCash Financial, an Olympia, Wash.-based CUSO providing automated technology for financial institutions offering short-term loans, agreed the interest rate could discourage credit union participation.

He said a 28% APR is a significant barrier to entrance and does not provide an adequate operating margin for credit unions interested in entering the short-term loan market.

“We feel an APR of 36% would greatly improve adoption, profitability and entrance into this space,” he said.

In addition, he said the 28% interest rate “perpetuates regulatory inconsistency” since programs such as the Department of Defense’s Military Lending Act allows an interest rate of 36%.

One credit union official, however, said he is pleased the NCUA is trying to make it more attractive for credit unions to offer short-term loans.

“PAL loans from credit unions are clearly a better choice than conventional payday loans, especially for folks who find themselves in repeated cycles of borrowing just to cover everyday living expenses,” said Jay Hartlove, compliance manager at Patelco Credit Union, which is located in Pleasanton, Calif., and has $6.4 billion in assets.

He continued, “Yet, only a small fraction of credit unions have a PAL program. We are in favor of the changes the NCUA is proposing that will make it easier for credit unions to develop PAL programs.”

But even Hartlove contended the NCUA proposal will not do the trick.

He said the new program should remove the limit on how many loans can be made within a certain period of time as long as a borrower has only one loan at a time. He said the program also should allow credit unions more flexibility to tailor loans, while still remaining within the safe harbor afforded by the CFPB rules.

“Our point here is that even though the proposed changes in the NCUA rule would seem to help smaller credit unions serving poorer communities, opening up the options for PAL programs would also help larger credit unions with more affluent memberships to build PAL programs,” he said. “Our experience showed that even people who make a steady income can fall into the continuous borrowing trap.”

He also noted, “Credit unions need the flexibility to meet their members’ needs.”

However, one credit union executive said the regulatory climate is too uncertain to start any new PAL program. The NCUA should wait until the CFPB decides whether it will repeal or amend its short-term loan rule before proposing anything new, John Conine, SVP for consumer lending at Schools First Federal Credit Union in Santa Ana, Calif., said. His credit union has more than $15 billion in assets.

Acting CFPB Director Mick Mulvaney has said he will revisit the strict payday lending rules developed by his predecessor, Richard Cordray. In the Spring version of its regulatory agenda, Mulvaney said the agency is likely to issue proposed rules in February.

Meanwhile, Conine said his credit union offers an open-end, short-term payroll savings loan with a 12-month repayment period and 17.9% interest rate cap. Under the credit union’s loan program, 5% of the amount repaid goes into a savings account for the borrower.