Party-line split continues as NCUA approves new payday loan rule

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The National Credit Union Administration board on Thursday approved a payday alternative lending rule in a party-line vote that generated a rare amount of controversy for a relatively mundane regulation.

In a move NCUA Chairman Rodney E. Hood called a “free-market solution that responds to the need for small-dollar lending,” the board voted 2-1 in favor of a measure to double the size and term of its Payday Alternative Loan product. Known in agency shorthand as PALS II, the rule doesn’t supersede the 2010 original, but rather is intended to add flexibility while retaining key structural safeguards.

“For this option to work, we had to strike a balance between flexibility and consumer protection,” Hood said. In addition to upping the loan limit to $2,000 and extending the term to 12 months, PALS II also eliminates the $200 minimum borrowing requirement, as well as a stipulation borrowers had to be members for at least a month in order to apply. At the same time, PALS II retains provisions limiting borrowers from receiving more than three PALS loans in a six-month period, or having more than one outstanding at any given time. It also kept in place a $20 limit on processing fees.

Hood and Board Member J. Mark McWatters, both Republicans, voted in favor of the regulation. Board Member Todd Harper, the panel’s lone Democrat, said PALS II included a number of “positive elements,” but he added that its widened lending range is “a bridge too far,” before casting a “no” vote.

PALS II represents the third major rule Harper has opposed since joining the board in April. In June, he voted against a measure delaying implementation of the agency’s risk-based capital regulation until 2022, saying the board would better serve the industry by focusing on concentration risk and other issues that pose a wider threat to the National Credit Union Share Insurance Fund. In July he objected to a regulation that increased the appraisal threshold for commercial real estate loans to $1 million from the previous $250,000.

Harper said Thursday that allowing borrowers to take less than $200 would create situations where a PALS loan’s annual percentage rate, or APR, could top 100%. At the opposite end of the spectrum, loans as high as $2,000 “look like a personal loan to me.”

Interest on personal loans is capped at 18%, while lenders are permitted to charge 28% for PALS loans, Harper noted. At that rate, “a $2,000 PALS loan could come with interest and fees as high as $300. That could push some stressed households into a cycle of debt,” Harper added.

Sen. Sherrod Brown, D-Ohio, was also critical of the rule.

“NCUA should make it easier, not harder for hardworking Americans to obtain safe and affordable loans and pay back their loans responsibly,” Brown said Thursday in a press release. “Today’s vote continues to show that Trump regulators would rather stand with industry instead of working families.”

Brown also spoke out earlier this year on the agency's decision to postpone RBC implementation.

Both Hood and McWatters are Republican appointees, though neither was first appointed by Trump. Hood first served on the board during the George W. Bush administration while McWatters was appointed by President Obama.

While lending under PALS has grown significantly since the program was created, it still represents a relatively minuscule component of the industry’s overall portfolio. According to NCUA, 601 credit unions had outstanding PALS loans totaling just $160.3 million as of June 30. While McWatters acknowledged PALS II “doesn’t solve the whole problem” of small-dollar lending, “it helps a lot,” he said, adding that retaining the PALS I lending limits would likely result in more borrowers resorting to traditional payday loans.

“We can’t be too theoretical,” McWatters said. “For the person that’s seeking $50 or $1,500, they’re going to get it, because they need it.”

McWatters noted that the Pew Charitable Trust – which he said “is hardly a payday loan advocate” – recommended in a comment letter on the proposal that NCUA increase the borrowing limit to as much as $4,000 and extend the allowable term to 36 months.

For his part, Alex Horowitz, a senior research officer for Pew’s consumer finance project, said Thursday in a press release that the PALS II adjustments didn’t go far enough.

“NCUA clearly believes affordable small credit is important, but today’s announcement is largely inconsequential,” Horowitz said. “It doesn’t create the flexibility that borrowers and credit unions need for affordable small loans to become a staple credit union product.”

In other actions, the board approved a final regulation amending the supervisory committee audit regulation for federally insured credit unions and another that updates its regulation on federal credit union bylaws.

The bylaw provision provides detailed guidance outlining an institution’s to limit services to a disruptive or abusive member.

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Payday lending Consumer lending Financial regulations Law and regulation Compliance NCUA Pew Charitable Trusts