But the CFPB cannot make the changes needed to encourage credit unions to enter the business, according to one credit union official whose institution offers short-term loans. The NCUA would have to take additional action to change its Payday Alternative Loan program to help lure credit unions into that business, Luis Peralta, SVP at the $4 billion Kinecta Federal Credit Union in Manhattan Beach, Calif., said

As it stands now, the PAL program's parameters are too restrictive, Peralta said.

The CFPB earlier this month proposed allowing short-term, small-dollar lenders to make loans without determining a borrower's ability to repay.

The proposal would eliminate portions of the agency's 2017 rule, a move long sought by Republican opponents of agency operations.

In proposing to rescind that section of its 2017 rule, the agency said that the old rule would limit consumer access to credit. That proposal will be open for comment for 90 days after it is published in the Federal Register.

The agency also proposed to delay the Aug. 19, 2019 effective date for the mandatory underwriting provisions to Nov. 19, 2020.

The agency is not proposing to reconsider the payments section of the 2017 rule.

The strict payday lending rules were issued by then-Director Richard Cordray, an Obama Administration nominee, in 2017. When Cordray left to run for Ohio governor, then-Acting Director Mick Mulvaney said he intended to reexamine that rule.

Now, CFPB Director Kathy Kraninger is implementing those intentions.

The agency said rescinding the rule might allow credit unions and banks with under $10 billion in assets to begin offering short-term loans. Under the 2017 rule, loans modeled after the NCUA's PAL plan were exempt from the rule.

And indeed, credit unions said the CFPB's original ability-to-pay provisions weren't helpful in convincing credit unions to enter the short-term loan business.

Peralta said the ability-to-repay requirements would raise the cost of origination and compliance.

"The CFPB's ability-to-repay requirements were focused on very high-cost loans because those loans pose great risk to consumers," he wrote in a letter to the NCUA last year.

But simply removing that requirement won't convince credit unions to get into the business, others said.

"The CFPB revoking the ability-to-repay requirements would not result in more credit unions offering small loans," Alex Horowitz, senior research officer in the Pew Charitable Trusts' consumer finance office, said. "The 2017 ability-to-repay safeguards applied only to balloon-payment loans, meaning either single-payment loans, terms of 45 days or less, or loans longer than that with a balloon payment. Credit unions generally don't offer those types of loans, and that's a good thing. Balloon payments are dangerous for consumers, and very few credit union members who seek small credit can afford to repay in less than 45 days."

Hubbard said payday loans are expensive to offer, with a high loss ratio – nearly 10% at One Detroit. But he said nearly 20% of his members use the product.

"I don't think the actual ability to pay restrictions are a significant roadblock to [credit unions] considering providing alternatives, although the idea of regulatory restrictions may be," he said. "The uncertainty of what the CFPB was considering was a deterrent."

Peralta said the NCUA's PAL program is the "top impediment" keeping credit unions from offering short-term, small dollar loans.

The current PAL program was created in 2010. When the CFPB issued its controversial strict payday loan rule, the agency specifically exempted loans modeled after that program from the rules.

Through its PAL program, the NCUA permits federal credit unions to charge an interest rate of 1,000 basis points above the maximum interest rate established by the NCUA board and an application fee of not more than $20.

The agency has proposed a new loan program to supplement the 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.

But the design of the proposed program has drawn harsh criticism from both credit unions and consumer groups.

In commenting on the NCUA proposal, Peralta said for some borrowers, a small-dollar line-of-credit would help more than a short-term loan.

And he suggested that the NCUA set "regulatory parameters" rather than offer a specific product in order to help encourage credit unions to offer a loan program that is marketable in their region.

He added, "Each credit union should be allowed to implement their own guidelines to determine members' ability to repay at their own discretion."

Andrew Morris, NAFCU's senior council for research and policy, said removing the CFPB's ability-to-repay requirement would lift a significant regulatory burden from credit unions that want to enter the market.

But he too warned that the CFPB's action alone will not convince credit unions to begin offering payday alternatives.

"The PAL program is probably the starting point for reform if you want to encourage more credit unions to make small-dollar loans to their members," he said.

Alexander Monterrubio, CUNA's senior director of advocacy and counsel, agreed, saying that changes to the PAL program could lead to more credit unions offering the loans.

"CUNA has been supportive of the agency's effort, but we've asked the agency to go even further to provide flexibility for credit unions to meet the small-dollar needs of their members," he said.

Cathie Mahon, president/CEO of Inclusiv, looks at short-term loans from another perspective.

"Underwriting borrowers to succeed with our financial products are the very foundation on which cooperative financial institutions have been built," Mahon, whose organization was formerly known as the National Federation of Community Development Credit Unions, said. "Unlike payday lenders, we are regulated financial institutions. Our examiners assess our lending programs to ensure we have sufficient information to ensure a borrower's success."