CUNA Regulatory Comment Call
May 13, 2010
NCUA Issues Proposed Rule for Short-Term, Small Amount Loans
- The National Credit Union Administration (NCUA) has issued a proposed rule that would 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. This proposal would permit FCUs to charge an interest rate that is higher than the current usury ceiling in the Federal Credit Union Act, but 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.
- Comments are due by July 6, 2010 and are due to CUNA by June 25, 2010.
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 firstname.lastname@example.org and to Senior Assistant General Counsel Jeff Bloch at email@example.com; 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.
DESCRIPTION OF THE PROPOSED RULE AND BEST PRACTICES
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.
The rule also outlines the following "best practices," which are not intended to be an exhaustive list:
- For the STS loan program, FCUs should consider adding a savings component, financial education, reporting the loan payments to credit bureaus, and including electronic loan transactions as part of the program.
- Underwriting standards should address required documentation for proof of employment or income, which should include at least two recent paycheck stubs. Recurring income should be the key criterion in determining the amount and length of loan so that the borrower will be able to repay it without roll-overs. For members with established accounts, FCUs should only need to review a member's account records and proof of recurring income or employment.
- FCUs should consider strategies to avoid risks. This includes imposing a length of membership requirement, such as at least three months or more; requiring members to participate in a payroll deduction plan or direct deposit; and conducting a thorough evaluation of the FCU's resources and ability to engage in an STS loan program.
QUESTIONS TO CONSIDER REGARDING THE STS LOAN PROGRAM
(NCUA has requested comments on these issues)
- For STS loans, NCUA is considering a 36% APR limit, inclusive of all fees, either in lieu of or in addition
to the proposed APR limit that would also allow for an application fee of up to $20. (Please note that fees for
unanticipated late payments, defaults, delinquencies or similar occurrences would still not be included in the
APR under the 36% alternative.) Would you prefer this alternative and should it be in lieu of or in addition to
the proposed limit?
- The proposal would require FCUs to include in their written lending policies a cap on both the total number
and total dollar amount of STS loans. NCUA is instead considering imposing a specific cap on the dollar amount,
percentage, and/or number of STS loans that an FCU can have outstanding at any one time. Do you agree with this
alternative approach? How should such a cap be structured? Should it be as a percentage of assets or what other
formula should be used?
- Should borrowers of STS loans be required to participate in direct deposit or a payroll deduction program as
a condition for receiving an STS loan? Do you agree that this not only helps ensure payments are made, but
assists the FCU in verifying the member's employment status and income level as part of the underwriting process
and may also be useful for determining the loan term and amount?
- Should the rule require FCUs to impose a length of service requirement for members that they must meet in
order to be eligible for STS loans or should FCUs decide for themselves whether and what extent to impose such a
requirement, based on their own risk tolerances? The proposal suggests FCUs consider such a requirement but does
not impose one.
- For credit unions currently offering viable small amount loan programs, please describe your experiences in
operating a successful program and the specific features that have led to the program's success as a sustainable
and responsible alternative to payday lending.
- Should the rule require that STS loans provide for specific amortized payments and prohibit balloon payments?
Would requiring borrowers to repay or substantially repay the loan in one payment be feasible or would it
exacerbate a borrower's weak financial situation? Would balloon payments cause additional financial problems for
borrowers and/or lead them to return to payday lenders?
- Other comments?
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Deputy General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Luke Martone Senior Regulatory Counsel (202) 508-6743 email@example.com