"An FCU's program should be designed ultimately to try to help members end their reliance on payday loans and guide members toward the FCU's more mainstream, low-cost financial products and services, including financial counseling," the NCUA wrote in a seven-page letter.
NCUA's letter comes at a time when Congress is debating what role the agency, and other regulators, will have in regulating consumer financial products. The Obama administration wants to create a new regulatory agency that would likely shift some of the power away from the NCUA.
Consumer groups, including the National Consumer Law Center which wrote the NCUA a 20-page letter on payday lending abuses in January, have strongly supported a new agency, which the Obama proposal calls the Consumer Financial Protection Agency.
The NCUA cited as an example of a permitted program: an FCU offering a loan of $500 for 120 days at 16.9% APR and no fees. Minimum payments are due each payday, and if a member has received two loans, he or she must receive a budget counseling course before taking out a third.
The agency said that acceptable programs give members a chance to repay loans over a period of months, rather than within two weeks. Such a feature "may make it easier for members to pay off their loans and minimize rollovers and keeps the APR within legal limits.''
NCUA said an impermissible program would be one carrying a 0% APR but include a 20% application fee.
"The 20% fee does not accurately reflect the costs of processing applications, so the fee should be considered a finance charge under Reg Z and be included in calculating the APR. This would raise the APR above the 18% ceiling," the agency wrote.
The agency also said that if a CUSO makes payday loans, an FCU must divest itself of ownership interest.
To protect members, the NCUA suggested credit unions limit the number of rollovers or payday loans a member may have in a year, impose waiting periods between loans, permit members to rescind a loan within 24 hours after it is made and provide counseling services in connection with these loans.
CUNA Senior Vice President and Deputy General Counsel Mary Mitchell Dunn said she hopes the agency doesn't go so far in its regulation of these loans that it limits options for consumers.
"If examiners are overly aggressive with payday lending programs, then this will make it harder for credit unions to provide these products. Credit unions feel their members are being gouged elsewhere and want to help," she said. "They can be advantageous to consumers if done right, though some credit unions feel they can't afford to do them.''
NAFCU Director of Regulatory Affairs and Senior Counsel Carrie Hunt said the NCUA letter was "clear, helpful and user friendly."
She said the agency recognizes that through these programs "federal credit unions can enhance their members economic well being, and it's not that credit unions are trying to rip off their members."
The issue of payday lending has attracted considerable attention on Capitol Hill, and lawmakers are expected to address the issue later this year or next year.
Rep. Luis Gutierrez (D-Ill.), who chairs the subcommittee with jurisdiction over such issues, has introduced legislation that would limit interest and fees on payday loans to no more than 15% over a two-week period. In the Senate, Majority Whip Richard Durbin (D-Ill.) has introduced legislation to enact a 36% APR interest rate cap on consumer credit that is the limit Congress recently enacted for military personnel and their families.
The NCUA declined a request from the National Consumer Law Center to use its supervisory powers over state-chartered credit unions to place restrictions on those institutions' practices with regard to payday lending.
The center cited the FDIC's 1995 letter to federal- and state-chartered banks that said that providing such loans on a regular basis is "not responsible lending; increases institutions' credit, legal, reputational and compliance risks; and can create serious financial hardship for the consumer."
NCUA Director of Public and Congressional Affairs John McKechnie said the agency didn't attempt to address state-chartered credit unions that have federal insurance because the usury ceiling only applies to federal credit unions.
NASCUS Senior Vice President for Regulatory Affairs Brian Knight said his group is leery of any federal efforts that threaten the dual-chartering system.
"We look closely at preemption and related issues all the time," he said.
State laws about payday lending vary considerably. A 2008 survey by the Consumer Federation of America and the National Consumer Law Center found that 38 states don't protect consumers against high-cost payday loans.
The NCUA letter prompted press coverage, including an article and column in USA Today, which focused on payday lending practices at several credit unions. Unlike most recent coverage, these depicted credit unions in an unfavorable light and prompted CUNA and NAFCU to devise strategies to help credit unions get their story out.
CUNA issued talking points to state leagues in question-and-answer format, but CUNA Vice President of Communications Patrick Keefe said it wasn't overly concerned about the media coverage on the issue.
"After being the subject of so many positive stories, which centered on credit unions thriving while banks were hurting, we expected when journalists found out about a problem they would write about it as well," he said.
NAFCU Public Relations Manager Patty Briotta said it has worked with NAFCU Chairman and Nevada Federal Credit Union President/CEO Brad Beal, who was featured in one of the USA Today articles because the NCLC criticized the effective rates on its loans.
She said it hadn't received a lot of inquiries on this topic, but in recent months NAFCU has redoubled its efforts to promote awareness of credit unions in light of growing consumer dissatisfaction with banks.
Up in Senate
As of press time, the Senate hadn't confirmed Deborah Matz as chairman of the NCUA.
There was no controversy surrounding her nomination, she was approved by the Senate Banking Committee by unanimous consent, but the Senate's busy schedule before leaving for its scheduled recess caused a backlog.
Matz, who was nominated by President Obama in June, would take the board seat currently held by Rodney Hood and succeed Michael E. Fryzel as chairman. Fryzel, who has been chairman since joining the board July 29, 2008, would remain on the board as a regular member until his term expires on Aug. 2, 2013.
This would be a return to the board for Matz, she served from 2002-2005.