Credit Unions Debate Payday Rules
The CFPB's proposed payday lending rules will cause credit unions to flee the market, but they will help one group of people – loan sharks – two credit union officers have told the agency.
“Your regulation will now create an environment for loan sharks to prosper once again as no ‘legal’ financial institution could ever consider offering a loan under your ludicrous regulation,” Marty Tressell, president/CEO of High Plains Federal Credit Union, told the agency. High Plains, a credit union with about $39 million in assets, is located in Clovis, N.M.
Another credit union official echoed Tressell's sentiments.
“Unless you can regulate the individual in the alley with a paper sack full of money to loan, you aren't going to make a dent in the problem,” Terry Tucker, operations manager and U.S. Treasury contact officer at Pine Federal Credit Union in Pine Bluff, Ark., told the CFPB in comments submitted to the agency. “And those guys break fingers and legs if a payment is missed. If you want to fix the problem, spend your money on education in the schools.”
Tucker also made a recommendation.
“If you don't believe me, have some of your staff dress down into blue collar clothing and hit the street corners and start asking where you can borrow some money quickly and quietly,” he said. “I assure you, you will get data that will seldom, if ever, show up on a government report.”
Tucker said he purposely was blunt with the CFPB.
“If you become too politically correct, things get lost in the translation,” he told CU Times. Tucker's credit union has about $41 million in assets.
The CFPB is soliciting comments on the proposed rules – which total more than 1,300 pages – until Oct. 7. So far, more than 26,000 comments have been submitted on the controversial plan. The rules and the comments are posted on the federal government's regulatory website, regulations.gov. The payday lending rules are among the top trending topics on the governmentwide website.
The CFPB released the proposed rules on June 2.
Credit unions have been pressing for an exemption from the rules, which are designed to rein in payday lending that the CFPB considers predatory. The agency defined a payday loan as a short-term loan that is typically due on the borrower's next payday. Borrowers usually must give lenders access to a checking account or write a post-dated check for the full balance. The loans may cost between $10 and $30 for every $100 borrowed, and sometimes carry an APR of almost 400%.
The CFPB rules would permit loans modeled on the NCUA's Payday Alternative Loan program to continue.
Through its PAL program, the NCUA permits federal credit unions to charge an interest rate of 1,000 basis points above the maximum interest rate established by the NCUA board and an application fee of no more than $20. The loan must be structured with a term of 46 days to six months, and include substantially equal and amortizing payment due dates at regular intervals. No prepayment penalties are allowed. Under the program, the minimum loan is $200 and the maximum is $1,000.
In several pieces of legislation, Republicans on Capitol Hill have attempted to prohibit the CFPB from issuing the rules anytime soon, but given the partisan bickering and the short schedule, it may be difficult for any of those provisions to end up in final legislation.
Credit union trade groups have not yet submitted their detailed reaction to the proposed rules. However, in a combined letter, CUNA President/CEO Jim Nussle and Camden R. Fine, president/CEO of the Independent Community Bankers of America, contended the CFPB is targeting the wrong people.
“While we believe predatory or abusive lending practices deserve increased scrutiny, credit unions and community banks have no history of bad behavior when offering small dollar loans,” they wrote.
They continued, “Small dollar loans provided by credit unions and community banks do not fit into one specific category and subjecting them to a lengthy list of requirements would undoubtedly significantly reduce consumer options for these loan products.”
Finally, they said they are clear about what they believe the impact of the rule would be.
“However, the proposed rule, if finalized in its current form, would unquestionably disrupt lending by credit unions and community banks,” they wrote.
While CUNA and the ICBA made their positions clear, they were judicious in their criticism. Folks outside the Beltway weren't so gracious.
High Plains’ Tressell stated the sheer length of the rules was ridiculous.
“You have out done yourselves!” he wrote. “I did not realize that something so simple as borrowing money and agreeing to pay it back can take 1,300 pages to describe how it must be done! You indeed have exceeded all expectations for bureaucrats.”
Tucker agreed the size of the rules makes them impossible to handle, stating many credit union employees, particularly those from small and rural credit unions, have a high school education. He added that only 20% of his credit union's employees have a college education.
But some commenters pointed out that even their local credit union was not able to help them.
“How does your proposal help me?” asked Andy Hopkins. “My car broke down and I needed $250 to repair it. I had $75 and I only have a credit card with a $500 limit, which is close to being maxed. I was denied more on my credit card and my credit union would not give me a loan. So, I stopped by a payday loan and borrowed $200 and I agreed to pay it off when I got paid.”
Hopkins did not disclose where he lived or what credit union he had approached.