Division Arises Over Payday Proposal

The NCUA’s new Payday Alternative Loan II model did little to quell the battle over whether the program provides borrowers with an attractive alternative to predatory storefront payday lenders.

For Republicans on the NCUA board, the new option will provide borrowers with a loan that will not lock them into a cycle of debt if they need a small-dollar loan.

“The PAL II rule is a free-market solution that responds to the need for small-dollar lending in the marketplace,” NCUA Chairman Rodney E. Hood said at the September board meeting, during which the new loan option was adopted. “This can make a difference by helping borrowers build or repair credit records, allowing them to graduate to other mainstream financial products.”

If that was the NCUA board’s goal, the loan option does not do the trick, according to the Democratic board member, consumer advocates and a key Democratic senator.

“[The] 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 following the meeting. “Today’s vote continues to show that Trump regulators would rather stand with industry instead of working families.”

Brown said the original PAL option caps loans at $1,000 or less and includes sound underwriting while offering borrowers with an attractive alternate option to predatory lenders.

The new PAL option drops important safeguards, resulting in higher cost loans that could trap credit union members into a cycle of debt, he added.

And credit union trade groups had a less-than-enthusiastic reaction to the loan plan as well.

“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,” CUNA Chief Advocacy Officer Ryan Donovan said.

The new loan option is not meant to replace the original Payday Alternative Loan option, but instead is designed to provide credit unions with another option.

The final rule:

• Allows a federal credit union to offer a PAL II loan of 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 for 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.

The new plan comes at a time of continued regulatory uncertainty for the payday loan landscape.

The CFPB under Richard Cordray, an Obama Administration appointee, issued strict rules governing payday loans. The payday lending industry said such strict regulations would drive many lenders out of business, depriving people in need of short-term loans of an option.

Those rules exempted the original PAL program from that strict regulatory regime.

When President Trump took office, then-Acting CFPB Director Mick Mulvaney made it clear he did not like the strict rule and intended to make significant changes to it.

When CFPB Director Kathy Kraninger took office, she said the agency issued a proposed rule that critics said would not help consumers. The agency has not yet issued final rules governing payday lending.

Meanwhile, the NCUA board adopted the new PAL option.

NCUA Board Member Todd Harper voted against the plan, questioning whether the new option will help borrowers with their short-term needs and to avoid the pitfalls of traditional payday loans.

“The new rule would significantly expand the loan limits contained in the first payday alternative loan rule of $200 to $1,000. Instead, this new rule would allow loans of all sizes up to $2,000,” he said. “This is a bridge too far for me to cross.”

Consumer advocates joined Harper in criticizing the plan.

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 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 following the vote.

The Pew Charitable Trust, which has been studying small-dollar lending for several years, also said the new loan is not attractive to credit unions or borrowers.

The PAL II model is unlikely to convince many more credit unions to provide loans based on the PAL models, Alex Horowitz, senior officer with the Consumer Finance Project at Pew, said.

He said Pew would have preferred a plan that called for an 18% interest rate and a monthly service fee capped at $20. He said allowing a $4,000 maximum loan, rather than a $2,000 maximum loan, would be “very reasonable.”

Horowitz said 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.”