CFPB Payday Exemption Not a Credit Union Panacea
Proposed CFPB payday lending regulations could make it more difficult for credit unions to offer such services, even though the rules would exempt the model contained in the NCUA’s PAL program, credit union officials said Thursday.
The CFPB released the document totaling more than 1,300 pages late Wednesday and conducted a field hearing on the proposal Thursday in Kansas City, Mo.
“The sheer enormity … just leads to confusion,” Ben Morales, CEO of QCash, which markets short-term loan products to credit unions, said. “That’s just going to scare people off.”
He added, however, that while the complexity of the rules is daunting, he believes that QCash will be able to continue to market its loans.
“We’ve got to understand what is in and what is out,” he said. “I still think we can make it work. I think we have a solution that is viable.”
Credit unions had been pushing for a blanket exemption from the rules. They didn’t get that. Instead, the CFPB gave a blanket exemption to NCUA PAL loans.
The problem, according to Keith Sultemeier, president of the $4 billion Kinecta Federal Credit Union, based in Manhattan Beach, Calif., is that credit unions do not necessarily make money when they offer PAL loans. Testifying at the field hearing, he said his credit union lost $20 on every PAL loan made.
He said making a profit on small, short term loans has been a challenge, adding that his credit union is a not-for-profit, not a charity.
Having reviewed the CFPB proposal, Hank Hubbard, president/CEO of the $33 million One Detroit Credit Union in Detroit, said he does not think the CFPB proposal will affect the product his credit union offers.
“It does not appear to prohibit our product the way it is currently designed,” he said. “Ours is a line of credit for $500 with an annual fee of $70 and 18% APR. Draws are for $500 only and must be repaid in two months.”
He said that his credit union designed its short-term loan to help members avoid the so-called debt trap that the CFPB is concerned about.
He said, however, that he is concerned that the rules could discourage responsible lenders from offering alternatives.
“These rules may place even more real – or perceived – roadblocks to more responsible lenders trying to address the very obvious demand,” he said. “I worry that it could make unregulated or illegal alternatives even more prevalent. Those are even more toxic than what we have now.”
That is exactly the problem CFPB Director Richard Cordray said Thursday he wants to avoid.
“In particular, we are not intending to disrupt existing lending by community banks and credit unions that have found efficient and effective ways to make small-dollar loans to consumers that do not lead to debt traps or high rates of failure,” he said. “Indeed, we want to encourage other lenders to follow their model.”
Members of Congress immediately weighed in on the issue.
House Financial Services Chairman Jeb Hensarling (R-Texas), a critic of the CFPB, condemned the rules and Cordray in particular.
“Accountable to no one, he alone decides for all Americans whether they can take out a small-dollar loan to meet emergency needs,” he said, adding that states already regulate small dollar lenders.
However, Sen. Elizabeth Warren (D-Mass.), a defender of the CFPB, said the rules are a step in the right direction.
“The proposed new rule would crack down on the tricks payday lenders use to generate thousands of dollars in interest and fees from desperate families who get trapped in a cycle of debt that they can’t escape,” she said.