Anticipation: CFPB Payday Rules Could Crush CU Alternatives
New CFPB regulations on payday lending could effectively shut down alternatives at credit unions, some industry officials say.
The CFPB has not officially said that it's working on such rules, but Director Richard Cordray came close to acknowledging so on March 25 in remarks that accompanied a report on the loans.
“I will frankly say that we are now in the late stages of our considerations about how we can formulate new rules to bring needed reforms to this market,” Cordray wrote in prepared remarks. “[W]e intend to make sure that consumers who can afford to take out small-dollar loans can get the credit they need without jeopardizing or undermining their financial futures. But we also need to recognize that loan products which routinely lead consumers into debt traps should have no place in their lives.”
Jeremy Rosenblum, partner at Ballard Spahr LLP, a Philadelphia firm that specializes in banking law and compliance, said, “I don't think anyone doubts the CFPB is preparing payday lending regulations.”
He added, “The agency often issues reports about an issue before it draws up regulations about the issue, but we have been detecting for some time that regulations are in the works.”
Rosenblum and others familiar with the CFPB believe such new rules would address primarily two things: loan terms and ability to repay.
“Those two items are the most logical places to start once you take interest rates off the table,” Rosenblum said, noting that the CFPB is enjoined by the Dodd-Frank Act from capping interest rates. “The agency has contended that repaying these loans all at once and in a single payment challenges borrowers. So, we would expect a new rule to mandate paying the loan off in installments and checking to make sure borrowers can make those payments.”
Mike Wishnow, spokesman for the Pennsylvania Credit Union Association, said the ability-to-repay rule could kill consumer-friendly payday loan alternative programs offered by dozens of credit unions in his state, primarily because of the requisite credit checks.
The PCUA said 65 Pennsylvania credit unions offer the loans under the guidelines developed by the Better Choice program, a joint effort with state regulators. Last year, they wrote 11,178 loans worth more than $5.5 million, and placed almost $552,000 into savings accounts because of the loan's savings component, the association said.
Credit unions offering the Better Choice loans limit them to one at a time and allow the member to borrow up to $500 for up to 90 days.
They also lend the member an additional 10% that is deposited in an interest bearing savings account, cap interest rates at 18% and allow the choice of a variety of installment terms.
Wishnow said he doubted a repayment requirement of more than 14 days would hurt credit unions offering Better Choice loans, but said requiring credit checks would likely kill the program by chasing off borrowers who have had bad experiences with credit checks in the past.
“Many of these borrowers associate credit checks with having been turned down for loans in the past,” Wishnow observed. “If we start making credit checks, they likely won't come in.”
Jim Blaine, president/CEO of the $27 billion State Employees’ Credit Union, agreed that regulations along the lines that Rosenblum and others anticipate could end his North Carolina credit union's very successful Salary Advance Loan program, but for different reasons.
“We have made millions of loans worth billions of dollars since the program began,” Blaine said. “But our borrowers have also deposited more than $30 million with us in association with those loans. These are people who have never imagined they could save money. We don't want to end that program, but we don't want to enter into straight- up payday lending either.”
Blaine said the Federal Reserve told SECU a decade ago that the credit union could only attach a mandatory savings aspect to a loan program if the loan was repaid in a single payment. So if the CFPB mandates the loans be repaid on an installment system, Blaine said, SECU would not be as interested in continuing it.
“From our perspective, this is really a savings program designed to help our members move away from needing these types of loans,” Blaine said. “We tried it without the savings aspect in 2001, when we first began it, and it didn't work. We don't want to do that again.”
At press time, the Federal Reserve had not responded to requests for clarification of the regulations.
Blaine also doubted whether the CFPB really understood consumers who need these loans and whether mandating installment payments was the answer.
“We are a credit union,” Blaine said. “That means by definition, we are going to put our members in a loan product at the best rate to them. The Salary Advance Loan products are 12% per year; that's our most expensive loan. If these people were able to make installment payments, we would have already put them in a credit card at 9%.”
But credit unions could still avoid the impact of any new rules on the loans if the agency structures the rule similarly to the way it structured the mortgage rules, Blaine observed.
Although the CFPB cannot cap interest rates, the agency can use them in its rules. For example, payday lenders making loans with an APR of more than 36% per year might be required to follow the new rules, but lenders whose loans carry APRs of less than 36% per year would not have to do so.
“This would exempt every, or almost every, credit union payday alternative program,” Blaine said.