In 2-1 Vote, NCUA Board Adopts Payday Loan Alternative
The final rule allows a federal credit union to offer a PAL II loan of up to $2,000.
A divided NCUA board on Thursday adopted a rule that allows federal credit unions to make short-term loans of up to $2,000 as an alternative to predatory payday loans.
The new Payday Alternative Loan option, known as PAL II, would not replace the current PAL model, but would provide credit unions with another loan option.
Board member Todd Harper voted against the proposal, saying that the $2,000 loan limit was too high.
“That is a bridge too far for me to climb,” he said, adding that a $2,000 loan looks more like a personal loan than a payday alternative loan. He said that the loan limit could push a financially strapped family into a cycle of debt.
Board Chairman Rodney Hood said the loan alternative offers another option to pernicious payday lenders.
He said that any small-dollar loan program “must strike the balance between flexibility and consumer protection.”
Federal regulators have been exploring ways to encourage borrowers to seek loans at traditional financial institutions rather than storefront payday lenders that many say lock borrowers into a cycle of debt with high fees and interest rates.
NCUA officials said the higher loan amount—the current PAL program has a $1,000 limit—would give credit unions to meet the demand for higher loan amounts and would allow borrowers to consolidate multiple payday loans into a single PAL II loan.
They said some organizations that filed comments on the $2,000 loan limit said the maximum loan was too high, while others said it was too low.
Board member J. Mark McWatters cited comments that the loan was too low and should be higher, adding that the board will continue to examine the short-term lending problem
The final rule:
- Allows a federal credit union to offer a PAL II loan of a up to $2,000.
- Establishes a loan term of at least one month with a maximum maturity of 12 months.
- Sets a maximum interest rate of 28%, the same as the original PAL program.
- Allows a federal credit union to make a PAL II loan immediately after a borrower becomes a member of the credit union.
- Allows a federal credit union to make only one type of PAL loan to a borrower at any given time.
- Prohibits a federal credit union from charging an overdraft fee in connection with a loan drawn against a borrower’s account.
- Allows a credit union to charge a maximum application fee of $20.
- Allows a federal credit union to establish its own underwriting standards.
- Allows borrowers to take out a maximum of three PAL II loans over a six-month time period.
During Thursday’s meeting the board also adopted final rules governing supervisory committee audits and federal credit union bylaws.
Also Thursday, the board was told that credit union liquidations have cost the Share Insurance Fund $41.5 million this year.