CUNA Regulatory Comment Call

May 13, 2010

NCUA Issues Proposed Rule for Short-Term, Small Amount Loans


Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at and to Senior Assistant General Counsel Jeff Bloch at; or mail them to Mary and Jeff in c/o CUNA's Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, 6th Floor, Washington, DC 20004. You may also contact us if you would like a copy of the proposal or you may access it here.


The intent of the 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 would also benefit members to the extent that FCUs report positive payment histories for these types of loans to credit bureaus, and members would also by able to improve their credit scores and qualify for future loans at lower costs.

The proposal would apply to closed-end loans of short duration, but would not alter the existing rules that govern these products and would not prohibit open-end loan programs that are currently permissible. The proposal would also not prohibit an FCU from participating in a closed-end payday loan program that is permissible under current NCUA rules and the Federal Reserve Board's Regulation Z, the rules that implement the Truth in Lending Act.

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

The APR is calculated in the same manner as it is under Regulation Z. NCUA recognizes that this ceiling and APR calculation method prevents FCUs from making short term, small amount loans to their members in a manner that covers their reasonable costs. This proposal would permit a higher APR for STS loans, but would prohibit the charging of any fees in excess of a specified application fee and would also restrict the duration and the amount of these loans.


Proposed Rule

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. FCUs must also implement appropriate underwriting criteria for STS loans in order to minimize risk. In developing the criteria, the FCU should focus on the member's relationship with the FCU and the borrower's ability to repay the loan on time. This should require the member to produce at least two recent paycheck stubs, but it should not generally be necessary for the FCU to obtain a credit report.

Best Practices

The rule also outlines the following "best practices," which are not intended to be an exhaustive list:


(NCUA has requested comments on these issues)

Eric Richard • General Counsel • (202) 508-6742 •
Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 •
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 •
Luke Martone • Senior Regulatory Counsel • (202) 508-6743 •