Usury laws vary state by state. However, in the federal system, Congress through the Federal Credit Union Act, made it clear that any rate above the present the NCUA authorized 18% is usurious, and the 18% rate is only under unique circumstances. The NCUA is required to justify this matter periodically. The NCUA has a mandate to return the rate back to 15% if the circumstances do not warrant a higher rate. The maximum rate that the NCUA can approve is 21%.
Some state-chartered credit unions do business in states that do not have usury limits. The state places the moral dilemma on the shoulders of the credit union's board of directors.
Federal credit unions are required to protect members from usurious programs as a matter of law. The NCUA provided guidance on the matter. To its credit, it wrote a very broad instruction that gave federal credit unions a lot of room to develop a lending program and charge fees consistent with Regulation Z. Here lies the rub! The NCUA is forcing credit unions to obtain individual legal and accounting advice as to amount and type of charges that can be used in processing the loan application. The NCUA has not involved themselves in the specifics of this matter. They did provide a list of examples. The list does not include a provision for loan losses and legal fees. It is not an oversight that these fees are absent.
I hope that any federal credit union that wishes to do a payday loan program has sought appropriate legal advice concerning Regulation Z. I have checked with attorneys familiar with Regulation Z, and they advise that it would be difficult to conclude that loan losses are a charge that you can put into the fee to process a loan and avoid adjusting the interest rate above 18% for a federal credit union.
It is regrettable that many credit union leaders, the trade associations and the NCUA are silent on the blight of payday lending in the federal credit union industry. If the arguments that are being advanced are correct, they should request that Congress raise the usury limits or ask that the Federal Reserve Board amend Regulation Z to include loan-loss projections and legal and accounting costs in the charges that may constitute an administrative fee excluded from the finance charge.
Certified Financial Planner
Rehoboth Beach, Del.