Consumer Advocates Pan New NCUA Payday Loan Alternative
Experts argue the new model is unlikely to convince many more credit unions to provide loans based on the PAL models.
Amid muted reaction from credit union lobbyists to the NCUA’s new Payday Alternative Loan model (PAL II), consumer advocates said the agency plan still could lock borrowers in a cycle of debt.
“The proposal allowed flexibility for credit unions with no limitation on the number of loans made to a borrower, as long as an outstanding [loan] was repaid before obtaining a new one,” said Carrie Hunt, NAFCU’s executive vice president for government affairs and general counsel.
She added, however, the proposal includes a provision that prohibits credit unions to make more than three loans over a six-month period. “NAFCU is concerned that without this flexibility, at-risk borrowers will turn toward less consumer-friendly options,” she added.
CUNA officials were lukewarm in their reaction.
“Credit unions offer safe and affordable short-term loans to their members and we thank the NCUA board for creating an additional payday alternative loan option,” Ryan Donovan, CUNA chief advocacy officer said.
On a 2-1 vote, the 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 plan, saying that the $2,000 maximum loan was too high.
“Particularly when coupled with financial counseling, as many credit unions provide, such lending can be a powerful tool to help people get out of debt and climb the ladder toward financial security,” board Chairman Rodney Hood, said during the meeting.”
Others disagreed.
“NCUA should make it easier, not harder for hardworking Americans to obtain safe and affordable loans and pay back their loans responsibly,” Senate Banking Committee ranking Democrat Sen. Sherrod Brown of Ohio said. “Today’s vote continues to show that Trump regulators would rather stand with industry instead of working families.”
Brown said that the PAL I model offers a maximum loan of $1,000, requires sound underwriting and costs less than traditional payday loans. He said the new PAL II model drops these safeguards, resulting in higher cost loans that could trap borrows in a cycle of debt.
The NCUA plan should have required that credit unions explicitly verify that a borrower has the ability to repay their loans before the loan is approved, Mike Calhoun, president of the Center for Responsible Lending said.
He said that the $2,000 loan maximum and an interest rate higher than other loans made by a credit union could result in borrowers being trapped in a cycle of debt.
“The NCUA Board today missed an opportunity to buttress its consumer protections and instead weakened them,” he said.
The PAL II model is unlikely to convince many more credit unions to provide loans based on the PAL models, said Alex Horowitz, senior officer with the Consumer Finance Project at the Pew Charitable Trusts.
He said that Pew would have preferred a plan that called for an 18% interest rate, and a monthly service fee capped at $20. He said that allowing a $4,000 maximum loan, rather than a $2,000 would be “very reasonable.”
Horowitz said that banking regulators are working on their own model plans, adding that depending on what they develop, “there is a risk that credit unions may be left behind.”
“Today’s step is a positive one, but a very small one,” Horowitz said. “This program needed a jolt. This is a tweak.”