Consumer Groups Ask NCUA To Close Loopholes Letting CUs Skirt Payday Loan Rules

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ALEXANDRIA, Va. – Several consumer groups told NCUA that credit unions are using a variety of methods to evade federal interest rate ceilings and other restrictions as the popularity of payday loan programs continues to grow.

“Many credit unions are engaging in abusive payday lending, either directly or indirectly, through credit union service organizations,” Jennifer Johnson, an attorney with the credit union-sponsored Center for Responsible Lending, wrote in a comment letter to NCUA on proposed payday loan reforms. “Additionally, some federal credit unions are investing in CUSOs that engage in payday lending, often in violation of state lending laws. NCUA should prohibit credit unions from owning stakes in service organizations that make loans that violate state laws or exceed the 18% rate cap.”

Ann Baddour, an attorney with consumer advocacy organization Texas Appleseed, which has long teamed with credit unions to fight lender abuse, said her group is concerned that as a growing number of credit unions introduce payday loan programs, they will come in conflict with the needs of the targeted population. “The last thing I wanted to do is be out there fighting credit unions,” she told Credit Union Journal yesterday. “We believe the vast majority of credit unions do really great jobs in serving their members and providing needed services like this.”

But groups such as Center for Responsible Lending, which is financed by Center for Self-Help and its community development credit union, and the National Center for Consumer Law, said credit unions are using a variety of methods to skirt NCUA’s 18% maximum annual percentage rate on loans and using surreptitious fees and charges that are not stated clearly to payday loan borrowers.

“NCUA’s initial task must be to address triple-digit payday lending by credit unions that are evading their legal usury caps,” wrote Lauren Sanders, an attorney with the Boston-based National Consumer Law Center, which wrote a scathing report in credit union payday lending earlier this year. “Many federal and state credit unions are offering short-term loans with true rates above 18%, up to 400% or even higher.”

Among the credit union methods the consumer group cited are the use of third-party CUSOs to underwrite the actual loans, the use of “finders’ fees,” repeated application fees and high rates for open-ended lines of credit.

The groups want NCUA to go further in its proposed reforms on payday lending that would raise the interest rate ceiling on payday loans to as high as 36%. Additionally, the consumer groups want NCUA to limit fees that are not captured in the calculation of the APR. They want to prohibit balloon payments and allow repayments as long as 90 days.

NCUA says it already has definite prohibitions on some of the maneuvers alleged by the consumer groups. It says granting of payday loans is not a permissible activity for CUSOs owned by federal charters and that it monitors for compliance with the 18% usury ceiling through its electronic examinations program, known as AIRES.

“NCUA monitors compliance through our examination and supervision programs,” John McKechnie, chief spokesman for the agency, said yesterday. “Additionally, we respond to and investigate all member complaints and public inquiries about federal credit unions, particularly those involving a regulatory violation.”

“NCUA has identified both payday programs and occasional loans under indirect programs that did not meet the spirit and letter of Reg Z and immediately acted to require revisions or a cessation of the program,” he said. “We have also found rates in excess of 18% with indirect programs. These instances are rare, but in those instances we require the credit union to take immediate corrective action and lower the rate to within an allowable regulatory ceiling.

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