Anticipated CFPB payday loan regulations could shut down creditunion alternatives, executives warned.

For the record, the agency has not officially said it is workingon payday loan regulations, but CFBP Director Richard Cordray cameclose to acknowledging the project on March 25 in remarks thataccompanied a new CFPB report on the loans.

“I don't think anyone doubts the CFPB is preparing paydaylending regulations,” said Jeremy Rosenblum, a partner in thebanking law firm of Ballard Spahr LLP, a Philadelphia-based firmthat specializes in consulting and advising financial institutionson compliance issues.

Rosenblum and other sources familiar with the CFPB believe thenew rules, when they come, will primarily address two things:Payday loan terms and the ability of borrowers to repay.

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So if the agency were to release payday loan rules along theseexpected lines, how might they impact credit unions' programs thatoffer a more consumer-friendly source for small dollar, short termloans?

Mike Wishnow, spokesman for the Pennsylvania Credit UnionAssociation, predicted new rules that mandate ability to repayverification could hamper the ability of dozens of Pennsylvaniacredit unions to offer the PCUA's Better Choice loan program.

“The main problem with an ability to repay calculation is that Idon't know how you get there without pulling a credit report,”Wishnow said. “And I expect that if we tell our members wehave to pull a credit report as part of the loan process, they willjust stop coming.”

Jim Blaine, CEO of State Employees' Credit Union, headquarteredin Raleigh, N.C., agreed with Wishnow that regulations along thelines that Rosenblum and others anticipate could end his creditunion's very successful Salary Advance Loan program.

However, Blaine cited different reasons.

The leader of the $27 billion credit union explained the FederalReserve told SECU about 10 years ago it could only attach amandatory savings aspect to a loan program if the loan was repaidin a single payment.

So, if the CFPB mandates payday loans be repaid on aninstallment system, Blaine said, that might do away with thedeposit aspect, and SECU would not be interested incontinuing its current program.

“From our perspective, this is really a savings program designedto 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 dothat again.”

But credit unions could still avoid the impact of any new ruleson the loans if the agency structures the rule similarly to the wayit structured the mortgage rules, Blaine observed.

Although the CFPB cannot cap interest rates, the agency can useinterest rates in its rules. For example, payday lendersmaking loans with an APR of over 36% per year might be required tofollow the new rules, but lenders whose loans carry APRs of lessthan 36% per year would not have to do so.

“This would exempt every, or almost every, credit union paydayalternative program,” Blaine said.