November 26, 2012
Mary Rupp
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314–3428
RE: Comments on Advance Notice of Proposed Rulemaking for Part 701, PAL Amendments
Dear Ms. Rupp:
On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association that exclusively represents federal credit unions, I am writing you regarding the National Credit Union Administration’s (NCUA) Advance Notice of Proposed Rulemaking (ANPR) regarding payday-alternative loans (PALs).
First and foremost, NAFCU would like to express our appreciation to the NCUA for issuing the ANPR to seek comments on regulatory changes that are needed to provide credit unions increased flexibility so that they can be in a better position to offer PALs. NAFCU has, both in letters and in other contexts, expressed the importance of the agency revisiting its rules on this issue.
Further, NAFCU strongly encourages the NCUA to work with the Consumer Financial Protection Bureau (CFPB) on payday lending given that one of the CFPB’s stated goals is to curtail predatory lending. NAFCU believes the NCUA should encourage the CFPB to use its statutory authority to regulate payday lenders in a manner that would prevent predatory lenders from taking undue advantage of consumers.
Comments on the ANPR
Cost of Credit
Currently, the NCUA regulations prohibit a federal credit union from charging an interest rate for a PAL greater than 10 percent above the NCUA-established general interest rate, which is currently 18%. Thus, the maximum interest rate that a FCU can charge is 28%. In addition, the NCUA regulations require that a PAL be greater than $200 but no more than $1,000, be fully amortized, and have a minimum maturity term of one month and a maximum term of six months. A credit union may not make more than three PALs to any one borrower in any rolling six month period, and cannot rollover any PALs. Also, and importantly, a credit union may not charge an application fee above the actual costs associated with processing the application, and in any case, not more than $20.
In the ANPR, the agency has identified the application fee restriction and the interest rate cap as two of the main provisions that are being especially examined for revisions.
NAFCU stresses the importance of providing credit unions as much flexibility as possible so they can offer a viable alternative for their members and their communities. For a credit union to offer the loan and protect its full membership, it must be able to adequately cover the risk in making the loan. Credit union PALs are extremely limited in their use and only serve as an alternative to a payday loan.
The NCUA can provide added flexibility by defining the term “finance charge” for the purpose of these loans. Currently, for other purposes, the NCUA has adopted the definition of “finance charge” in Regulation Z when it looks at the cost of credit and whether an application fee only covers administrative costs. With the CFPB potentially changing this definition for mortgage loans, we believe NCUA should move to define a finance charge to ensure credit unions can continue to offer these types of loans. A broader definition of what costs could be included in an application fee for the purposes of PALs would achieve this goal.
Short-term Loans vs. PALs
Under the ANPR, short-term, small dollar loans would be referred to as “payday alternative loans.” NAFCU believes this change could unnecessarily confuse consumers, the market place and stakeholders alike, and urges the agency to refrain from making the change. While we understand that using the term “alternative” is intended to distinguish these credit union loans from loans issued by payday lenders, we are not convinced that it accomplishes this goal. Further, we believe credit unions should be able to refer to their product as they so choose, taking into account their membership and target groups. The NCUA should make it clear that credit unions can brand their product in a manner that they believe would be most effective for their situation. On balance, we believe maintaining the status quo (i.e., referring to these loans as “small term, small dollar” loans) for regulatory purposes is preferable even if credit unions may refer to these loans as PALs or another reasonable term when branding their product.
Minimum Loan Amount and Duration
NAFCU believes the NCUA should remove the minimum loan requirement of $200. NAFCU believes setting a minimum amount will force some consumers to borrow more than they need. For instance, if a person is unable to pay their monthly cell phone bill of $100, getting a PAL from a credit union would not be an option for them unless they were willing to borrow an extra $100. If a member is unwilling to borrow more than they need, the member might instead turn to another lender. NAFCU believes this might drive consumers away from using credit unions, as these members will be encouraged to find other lenders, oftentimes payday lenders that charge significantly more for such loans. Also, borrowers are usually able to pay off small loans faster than larger loans. Having a smaller loan will more likely prevent members from being stuck in a cycle of needing these loans. Moreover, smaller loans that are paid off quicker will reduce the risk for credit unions. Smaller loans are not as risky to credit unions; therefore, issuing smaller loans may reduce the overall cost of their programs, and credit unions will be able to benefit from economies of scale and a larger risk pool.
Creating a minimum loan amount shuts out a significant amount of members who could benefit from a PAL but need less than $200 to cover their short-term needs. NAFCU believes each credit union should have flexibility to determine the minimum amount for such loans.
NAFCU appreciates the opportunity to comment on the ANPR. Should you have any questions or if you require additional information, please call me at (703) 842-2268.
Sincerely,
Tessema Tefferi
Regulatory Affairs Counsel