CUNA & NAFCU Warn of 'Seismic' Impact to CUs From Proposed Legislation

Lawmakers on the Senate Banking, Housing and Urban Affairs Committee discussed a proposal on Thursday to adopt a 36% “all-in” interest rate cap to apply to all credit union members. Currently, this cap only applies to military members. CUNA and NAFCU attempted to explain to committee members just how significant and “seismic” a move like this would be for the entire credit union industry.

In a letter from both organizations to the Committee, they stated, “Adoption of a 36% all-in cap will essentially require lenders to offer larger, longer duration loans because these loans are ‘easier’ to fit under the cap precisely due to their increased size and duration.” The letter continued, “This effectively encourages borrowers to take on more debt or, for many borrowers with lower creditworthiness, push them out of the market for small dollar credit altogether.”

NAFCU and CUNA explained to committee members that credit unions have seen the harm caused by high-cost payday lenders to members and applauded the efforts of the committee to rein in or curb those types of financial abuse. Both organizations seemed to believe this legislation that is being considered to extend the Military Lending Act, and seen as a possible simple administrative task, is not that simple and could be problematic for credit unions.

“In doing so, the legislation would not only establish a nationwide rate cap but also completely change the methodology used to calculate interest rates for non-servicemember consumers. While seemingly an innocuous technical change, the broad impact of an all-in APR cap on credit cards and small dollar loans would be seismic,” the letter stated.

In the letter, the trade organizations pointed out the “all-in” APR for short-term, small dollar loans “depends heavily on the duration and amount of the loan.” For instance, the NCUA’s Payday Lending Rule allows principal amounts to range between $200 and $1,000 with loan terms of one to six months with application fees up to $20 and an APR of up to 28%. “The CFPB under Director Richard Cordray determined loans made within roughly these parameters could be considered a consumer-friendly alternative to high-cost payday loans and exempted loans generally conforming with these characteristics from the Bureau’s 2017 Payday Rulemaking. But even a loan with the Bureau’s “stamp of approval” can easily run afoul of a 36%,” the letter stated.

The letter went on, “Because credit unions tailor products to meet the unique needs of their members, there are many other consumer-friendly credit union products that would also be affected or eliminated by a 36% all-in rate cap as proposed in the legislation. Credit unions’ propensity for transparency and fairness is reinforced by their not-for-profit, democratically controlled structure. This accountability culture and member-first ethos are the reasons why credit unions – both state and federal charters – are widely considered to be pro-consumer alternatives to high-cost payday lenders.”

While the legislation appears to only exempt federal credit unions subjected to the usury cap directed by the NCUA, the trade organizations asked lawmakers to “include all federally-insured credit unions – regardless of charter type” in that exemption.