Amy K on Pay-day Alternative Loans
Date Posted: November 7, 2012
by Amy Kleinschmit, Director of Compliance
The NCUA wants to improve upon the its existing short-term, small amount loans regulations to encourage more federal credit unions to offer these “pay-day alternative loans.” Currently under §701.21(c)(7)(iii) Short-term, small amount loans, a Federal credit union may charge an interest rate of 1000 basis points above the maximum interest rate as established by the Board, provided the Federal credit union is making a closed-end loan in accordance with certain conditions.
These conditions include:
These conditions include:
1) The principal of the loan is not less than $200 or more than $1000;
2) The loan has a minimum maturity term of one month and a maximum maturity term of six months;
3) The Federal credit union does not make more than three STS loans in any rolling six-month period to any one borrower and makes no more than one short-term, small amount loan at a time to a borrower;
4) The Federal credit union must not roll-over any STS loan; however, the prohibition against roll-overs does not apply to an extension of the loan term within the maximum loan terms in condition (3) (above) provided the Federal credit union does not charge any additional fees or extend any new credit.
5) The Federal credit union fully amortizes the loan;
6) The Federal credit union sets a minimum length of membership requirement of at least one month;
7) The Federal credit union charges an application fee to all members applying for a new loan that reflects the actual costs associated with processing the application, but in no case may the application fee exceed $20; and
8) The Federal credit union includes, in its written lending policies, a limit on the aggregate dollar amount of loans made under this section of a maximum of 20% of net worth and implements appropriate underwriting guidelines to minimize risk; for example, requiring a borrower to verify employment by producing at least two recent pay stubs.
The NCUA is seeking feedback on several questions listed below, but also is interested in learning about other payday loan alternatives that credit unions are currently offering to their members. So I want to know, do you offer payday alternative loans to your members? Please email me at akleinschmit@cuad.coop by November 19, 2012.
Some questions that the NCUA is looking for feedback on include:
(1) Should the Board increase the permissible PAL loan interest rate, which is currently set at 28% (based on 1000 basis points above the maximum interest rate established by the Board for non-PAL loans)?
(2) Should the Board expand the permissible loan range, which is currently set from $200 to $1000?
(3) Should the Board permit PAL loan maturities of shorter than one month or longer than six months?
(4) Should the Board allow FCUs to make more than one PAL loan at a time to a borrower?
(5) Should the Board eliminate or decrease the one-month minimum length of membership requirement?
(6) Should the Board increase the limit on the permissible aggregate dollar amount of loans made, which currently is 20% of an FCU’s net worth?
I look forward to hearing from you by November 19. If there is anything else I can help with, please do not hesitate to contact me at akleinschmit@cuad.coop or 701.214.9721.