WASHINGTON — NCUA and NAFCU say the Department of Defense's proposal to expand the list of credit products covered by the Military Lending Act's 36% rate cap could hurt credit unions and their members.
Though both NCUA and NAFCU were quick to note they "strongly support" consumer protections, they expressed similar concerns that the DoD's move might have unintended consequences.
Current NCUA regulations allow federal credit unions to offer payday alternative loans with an interest rate of up to 28% and an application fee of up to $20. Under the Military Lending Act regulations, consumer credit to covered borrowers is subject to a 36% cap on the military annual percentage rate, or military APR, which includes application fees.
If these regulations are revised to cover payday alternative loans, the rate and fee for many payday alternative loans would be higher than the military APR cap, according to NCUA.
About 500 federal credit unions currently offer payday alternative loans. System-wide, these federal credit unions have about $23 million in outstanding loans, with an average loan balance of $382.
The Defense Department's proposed rule, released Friday, would cover other types of consumer credit, including credit card accounts and overdraft lines of credit with a finance charge. As with payday alternative loans, the combined interest rates and fees for these products could exceed the 36% military APR cap, even if the interest rate is below the general 18% interest rate cap for federal credit unions.
"Before finalizing NCUA's payday lending alternative rule, we specifically considered how NCUA's rule would fit with existing Defense Department regulations and determined that they were in sync," NCUA Board Chairman Debbie Matz said in a statement. "However, the Defense Department's new proposed rule would broaden the definition of 'consumer credit' under Military Lending Act regulations in a way that would prevent federal credit unions from making payday alternative loans permitted by our rule."
NCUA said it will work with the Defense Department to reach the goal of protecting members of the military without limiting the affordable financial services credit unions can offer.
Arty Arteaga, president and CEO of the Defense Credit Union Council, on Friday afternoon said his group was "still in the process of reviewing" the 150 pages that were provided Friday morning.
"Certainly we want to make sure any second- or third-level effects do not hurt our folks through unintended consequences that always come up with proposals such as this," he told Credit Union Journal. "Of course we want to support our troops, but credit unions that serve the military, and credit unions in general, are the most trusted financial services providers out there.
"We thought the current rule was sufficent and was working," Arteaga added.
Continuing Dialogue
NAFCU said it has worked "extensively" with the DoD and CFPB on financial issues affecting service members, whom credit unions have a long history of serving. The trade group reported it has continued a dialogue with the DoD and CFPB on addressing certain practices through regulations, such as the violations of the MLA protections that were shown in a Defense Department report in June.
"However, the association commented during a previous comment period that the current regulations — as revised in 2007 — are working well, and do not need to be revised," NAFCU declared.
Carrie Hunt, NAFCUs SVP of government affairs and general counsel, said NAFCU "strongly supports consumer protections and notes that credit unions are already subject to a cap on finance charges."
"We want to ensure that there are no unintended consequences from this rulemaking that would prevent credit unions, particularly those operating on military installations, from providing the safe consumer friendly products the men and women of the Armed Services have come to depend on," Hunt said.
As of now, MLA protections extend to closed-end payday loans for no more than $2,000 and with a term of 91 days or fewer, closed-end auto title loans with a term of 181 days or fewer, and closed-end tax refund anticipation loans. NAFCU pointed out the protections would not cover residential mortgages and credit extended for secured personal property purchases and vehicle purchase loans secured by an interest in the vehicle.
NAFCU said it will continue to work with stakeholders and to monitor this issue for its potential effect on service members and on the credit unions serving them.
Comments must be received by the Defense Department within 60 days of publication in the Federal Register — which is scheduled for Sept. 29.
The proposed rule is available online
