Payday Rule Spares Credit Unions
For two years, the credit union industry waited with great trepidation as the CFPB considered how to regulate the short-term lending industry.
But the new rule, issued this month, will allow the credit union industry to continue to make short-term loans if they use a model developed by the NCUA.
“Overall, based on our initial analysis and a conversation between Director Cordray and NAFCU CEO Dan Berger, the rule will not impact credit unions nearly as much as what was anticipated,” Michael Emancipator, NAFCU's senior regulatory affairs counsel, said.
He added, “This final rule resolves a long-standing cloud that has been lingering over the industry's head since the bureau initially outlined the rule in 2015.”
Specifically, the final rule will allow credit unions to make loans that conform to the NCUA's Payday Loan Alternative Program.
“Credit unions have an opportunity to get back to their roots,” said Ben Morales, CEO at QCash, which markets a payday alternative loan program to credit unions.
Morales said the QCash platform is configured to comply with the CFPB's rules.
And he said the new rules remove “nervousness” in the credit union community regarding short-term lending.
“Now we know what we can move forward with,” he said, adding that some financial institutions will simply decide not to offer short-term loans because of the associated overhead and compliance costs.
“There are going to be some financial institutions that aren't going to be interested,” he said.
CUNA officials called that a big win for credit unions.
“We are pleased the CFPB heeded our recommendations concerning a full exemption for the [PAL] program and the many other changes that were made to accommodate consumer-friendly small dollar loan programs at credit unions, including a more common-sense approach to which loans are covered,” CUNA President/CEO Jim Nussle said.
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 not more than $20.
Then-NCUA Chairman Rick Metsger wrote CFPB Director Richard Cordray last year asking that the agency defer to the NCUA on short term loans offered by credit unions. “As the prudential regulator for federal credit unions, (the) NCUA already ensures that members receive the type of protections the Bureau is seeking to address,” he wrote.
The CFPB said the “safe harbor” for credit unions only applies when the institutions follow all the requirements of the PAL program.
The bureau received comments stating credit unions should not be exempted at all, while others said they did not believe there should be any special provisions for credit unions, according to the 1,690-page rules and explanation issued by the agency.
The bureau said it is considering the needs of small credit unions by lowering the minimum length of the PAL loan to 30 days, bringing it into line with the NCUA.
CUNA officials said they are pleased that the agency is providing an exemption for most loans that are over 45 days with no balloon payments, as well as an exemption for loan providers issuing fewer than 2,500 covered loans each year that represent no more than 10% of revenue.
That exemption is important, according to Henry Meier, general counsel for the New York Credit Union Association.
“The CFPB clearly listened to [credit unions] that pointed out that they sometimes make short-term loans that actually help members,” he wrote in his blog, “New York's State of Mind.”
The rule will give states the leeway they need, NASCUS President/CEO Lucy Ito said.
“Director Cordray is saying that states that do not authorize payday loans will not be affected by the rule,” she said. “Further, states that do authorize payday loans will still be able to provide to most people the credit they need by passing the full-payment test or through one of the other options.”
But Nick Bourke, director of the Pew Charitable Trusts’ consumer finance project, said regulators will be under increased pressure to ensure that institutions comply with the rules.
“Bank and credit union regulators must now create the clear guidelines these lenders need in order to make small installment loans safely and profitably,” he said. “If they do, millions of consumers can save billions of dollars by gaining access to lower-cost credit.
Even though the final rules now have been issued, their future remains somewhat uncertain.
First, congressional opponents of the rule could try to nullify it through the Congressional Review Act.
And President Trump will be able to nominate CFPB Director Richard Cordray's opponent. Cordray may run for governor of Ohio, which would require him to resign before his term ends next summer. Or, he could serve the rest of his term. Either way, Trump will be able to nominate a new CFPB Director and is certain to choose someone who is an opponent of strict regulations. That new director could have an impact on the payday rules.
Finally, the payday loan industry already sounds like it's gearing up for a legal battle over the rules.
“There was an unprecedented outcry against this rule during the comment period – setting a record for a CFPB rulemaking and marking one of the largest of any federal agency,” Dennis Shaul, CEO of the Community Financial Services Association of America, said. “Yet, from the start, the CFPB's small-dollar loan rule was crafted pursuant to a pre-determined ideological agenda that relied on biased data, anecdotes and closed-door dealings with so-called consumer groups that have long sought to eliminate small-dollar lending.”