CUNA Comment Letter

CUNA Comments on Notice of Proposed Rulemaking – Short-term, Small Amount Loans

July 2, 2010

Ms. Mary F. Rupp
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-3428

RE: CUNA Comments on Notice of Proposed Rulemaking – Short-term, Small Amount Loans

Dear Ms. Rupp:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the National Credit Union Administration’s (NCUA’s) proposed rule that is intended to enable federal credit unions (FCUs) to offer short term, small amount (STS) loans as a viable alternative to predatory payday loans that are offered by other financial service providers. Under this proposal, FCUs would be permitted to charge an interest rate that is higher than the current usury ceiling in the Federal Credit Union Act, but the rule would impose limitations on the permissible term, amount, and fees for these types of loans. The proposal also identifies certain “best practices” that FCUs should incorporate into their individual STS loan programs. CUNA represents approximately 90 percent of our nation’s 7,800 state and federal credit unions, which serve approximately 92 million members.

Summary of CUNA’s Comments

Discussion

The intent of this proposal is to provide a regulatory framework so FCUs may provide a viable alternative to high- cost payday loans that are offered by other financial service providers. This will be of significant benefit to credit union members in that they will have access to STS loans on much better terms, as compared to the terms that they receive from payday lenders. This may even benefit all consumers if a significant number of FCUs choose to offer STS loans, as this will force other types of lenders to lower their rates and provide better terms in order to compete with those credit unions that provide these types of loans. This proposal would also benefit members to the extent FCUs report positive payment histories for these types of loans to credit bureaus, and members would also be able to improve their credit scores and qualify for future loans at lower costs.

Currently, FCUs may not charge an APR higher than the usury ceiling under the Federal Credit Union Act (Act). The ceiling in the Act is 15%, although NCUA has the authority to establish a higher rate. Last year, the NCUA Board agreed to extend the current 18% ceiling until January 2011.

The proposal would allow FCUs to impose an APR of up to 1000 basis points (10 percentage points) above the usury ceiling for STS loans. This would allow an APR of 28%, based on the current 18% ceiling. The proposal would also permit an application fee to be charged that reflects the actual cost of processing the application, although it may not exceed $20. Late fees would be permitted.

The proposal would also set a minimum and maximum maturity and dollar amount limitations for STS loans. The maturity, or length of the loan, would be a minimum of one month and a maximum of six months. Members may not “roll- over” the loan beyond the stated maturity date, which is a common feature of other types of payday loans.

The amount of the loan must be a minimum of $200, with a maximum of $1000. The FCU would only be permitted to make one loan at a time to a member and no more than three in any rolling six-month period.

The proposed rule would require FCUs to include in their written lending policies a cap on both the total number and total dollar amount of STS loans. The proposal also outlines several “best practices” that should be followed when providing these types of loans.

Last year, the CUNA Board issued a policy that supports the ability of credit unions to provide beneficial short- term, small amount loans as alternatives to predatory payday lending, which we agree has no place in the financial marketplace. The CUNA policy outlines a number of principles for credit union short-term lending that is intended to help consumers avoid a cycle of debt, a number of which are reflected in NCUA’s proposal, such as providing financial education and counseling and reporting positive payment histories to credit bureaus.

However, we are concerned the proposal may be too prescriptive with regard to these types of loans, with the result being that many credit unions may not even attempt to develop short-term lending programs that would meet these new requirements. For this reason, CUNA requests that NCUA provide additional flexibility for those credit unions that want to offer these types of programs.

For example, it is our understanding that NCUA is considering an alternative approach that would permit FCUs to charge an APR of up to 36% in which the APR would incorporate all of the fees. This would be similar to the rule issued by the Department of Defense in 2007 that provides limitations on similar loans that are extended to service members and their dependents. In developing short-term, small amount loans, NCUA should permit FCUs to choose either the 28% APR limit in the proposal, along with the $20 application fee limit, or the 36% limit that would incorporate other fees. This flexibility may encourage FCUs to develop a short-term lending program if they have the ability to choose the option that best suits their needs and the needs of their members.

We also believe there should be flexibility with regard to the proposed prohibition on the member’s ability to “roll-over” the loan beyond the stated maturity date. We certainly understand the problems that may arise with roll- overs in that they can trap borrowers in a cycle of high-cost debt.

However, for FCUs that provide these types of short-term, small amount loans, there will inevitably be times in which members will have a need to restructure their debt when unanticipated circumstances arise, such as loss of employment and when other emergency expenses arise. Under the proposal, these members will be in delinquency until the loan is eventually repaid, which will result in late fees and negative information being reported to credit bureaus. The other alternative may be that these members will then obtain a loan from a predatory payday lender in order to repay the credit union, another scenario that should also be avoided.

In these limited situations, it may be appropriate to roll-over the loan in some manner, especially if the credit union provides financial education and counseling, the approach that is highlighted in the CUNA policy that was adopted last year. Since we understand the problems that may arise with roll-overs, and agree that they should only be permitted in limited situations, we believe the best approach may be for credit unions to adopt policies that address the circumstances in which a roll-over may be appropriate and the circumstances when a roll-over to a new STS loan would be appropriate if a longer term, amortizing loan would not be a viable option.

Loans issued under the proposal must be for a minimum of $200. We urge NCUA to remove this restriction and allow FCUs to make loans below this amount. There are credit unions that currently make loans below this level, which indicates a need for these types of loans. Each credit union that participates in this proposed program should be able to decide the minimum amount, based on the members’ needs and the interests of the credit union.

Under the proposal, FCUs may charge an application fee that reflects the actual cost of processing the application, although it may not exceed $20. Many credit unions that provide these types of loans currently charge a fee of $25, and NCUA should consider this as it determines the appropriate threshold for the application fee.

We believe the above flexibility is necessary to ensure that FCUs can develop viable short-term, small amount loans that meet the needs of the members. This flexibility is also crucial because although such a loan program may be viable now, it may not be viable in the future, due to changes in the nation’s economic situation or as a result of upcoming legislative and regulatory changes that may impact these programs.

Flexibility is also needed because for many credit unions, these types of loan programs will be, or will likely be, a very labor intensive, branch-specific activity that will be costly and require significant human resources, as compared to the loan amount involved or as compared to other types of loan programs in which, for example, some or all of the process may be done online. As mentioned above, when faced with this scenario, we are concerned that many credit unions may not even attempt to develop loan programs that are consistent with the requirements under the proposal.

The “best practices” that are included in the proposal strongly encourage FCUs to impose a length of membership requirement and to require that members participate in a payroll deduction plan or direct deposit. We believe FCUs should determine for themselves whether these would be appropriate. For example, many members do not have direct deposit or payroll deduction so they would be completely excluded from this loan program. Although these mechanisms will certainly help ensure that payments are made, we believe credit unions should have the option to determine if any category of members should be excluded.

Under the proposal, FCUs would be required to include in their written lending policies a cap on both the total number and total dollar amount of STS loans. However, it is our understanding that NCUA is instead considering imposing a specific cap on the dollar amount, percentage, or number of STS loans that an FCU can have outstanding at any one time.

Although we understand the need for FCUs to have policies in place to address the total number and the total dollar amount of loans that should be made under these programs, we believe the FCU itself should determine the specific limits. Credit unions that offer higher risk loans may already have policies that address these specific issues, and we believe the proposed requirement that only one such loan may be made to a member at a time, and no more than three in any six-month period, will also help address these risks, all without the need for specific caps being imposed by NCUA.

Even if the final rule includes our suggested changes, we do not have the information at this time as to the extent FCUs would be able to provide these loan programs successfully. For example, a number of credit unions believe they can make these types of loans at an APR of 28%, while others have indicated that the APR needs to be higher. However, the dollar amount of interest for these loans would not be significantly greater for those credit unions that charge the higher APRs, since small changes in interest charges cause very large changes in the APR, due to the short-term nature of these loans.

Under agency policy, NCUA reevaluates one-third of its current rules each year, and all rules are reviewed every three years. We believe it is critical for NCUA to review this rule extensively at the time it is up for its reevaluation under this policy. This should include a survey of FCUs that have been offering loans under this program in order to assess their experiences and to determine how this rule should be changed to encourage further participation from FCUs, whether that would be by increasing the APR or providing additional flexibility in other areas. CUNA would certainly be happy to assist NCUA in these efforts.

Thank you for the opportunity to comment on the proposed rule that is intended to enable FCUs to offer short term, small amount loans as a viable alternative to predatory payday loans that are offered by other financial service providers. If you or other Board staff have questions about our comments, please give Senior Vice President and Deputy General Counsel Mary Dunn or me a call at (202) 638-5777.

Sincerely,
Jeffrey P. Bloch
Senior Assistant General Counsel