Credit unions are currently evaluating the first-ever federalregulations for payday loans and auto title loans, proposed in Juneby the CFPB. Public comments are due Oct. 7. As someoneexperienced in offering a payday alternative product, I believe theCFPB is right to step in and try to protect consumers, but theregulations need to be carefully designed and well-balanced if theyare going to keep credit available while also driving down loanprices. With the right approach, the CFPB can encourage morecredit unions to come into the market with lower-cost products oftheir own.

The CFPB has proposed rules that will give consumers more timeto repay in installments, but 300% APR installment loans – whichwould still proliferate in the market under the rules as nowproposed – are harmful too. Congress did not give the CFPB theauthority to limit interest rates, so the only way for them tobring down prices is to encourage lower-cost lenders like creditunions to offer better loans.

Credit unions as well as banks have mostly avoided making loansof just a few hundred dollars, even though all payday loanborrowers are “banked,” meaning they have a checking account(because it is a requirement to get a payday loan). I routinelyhear from credit union colleagues that they do not provide manysmall-dollar loans because of the difficulty of lending such smallsums at a fair price without losing money. And they make a validpoint.

For a while, our credit union did not offer small loans for thisreason. As a result, our members with low credit scores were goingoutside the credit union to get small loans from payday lenders,auto title lenders, pawn shops and rent-to-own stores. Once theydid, large payments trapped them in debt and high prices drainedscarce funds from their accounts. We tried to solve this problem byoffering a PAL loan, but the low revenue limit and the 30-daywaiting period after joining the credit union made itunsustainable, and we lost money on these loans.

To help struggling members out of the cycle of debt while alsolending sustainably, we developed a Payday Payoff Loan that allowed people to consolidate all oftheir payday, auto title, and other high-interest credit into onelower-rate loan repaid in installments over more time. Payments areset at an affordable 5% of each paycheck and reported to credit bureaus, soborrowers can improve their credit scores and qualify for otherproducts.

Borrowing $500 for six months from payday lenders in Californiawould cost a consumer around $900 in fees, but this loan costs thatsame borrower about 12 times less. We have issued more than 12,000 of these loansin the Los Angeles area, saving households millions of dollars anddemonstrating that this approach is scalable.

But under the CFPB's proposed regulations, we would probablyhave to discontinue these loans because of the “ability to repay”proposal's heavy underwriting and compliance requirements. The CFPBoriginally proposed to protect consumers by limiting payments forcertain loans to no more than 5% of a borrower's paycheck. With that type of clear standard and regulatory certainty, we could continue thislower-cost loan program and use automation to grow it to serve morepeople who have been trapped by high cost loans. Without it, theadditional staff time needed for processing applications andcompliance would make the path forward difficult if notimpossible.

If federal regulators can thread the needle of curbing high-costloans while enabling safer ones that are viable for consumers andcredit unions, then better credit can help people through toughtimes and keep them away from predatory lenders, which would beright in step with our movement's philosophy.

Luis Peralta is the chief administrative officer forKinecta Federal Credit Union. He can be reached at 310-643-1345 [email protected].