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

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

“I don't think anyone doubts the CFPB is preparing payday lending regulations,” said Jeremy Rosenblum, a partner in the banking law firm of Ballard Spahr LLP, a Philadelphia-based firm that specializes in consulting and advising financial institutions on compliance issues.

Rosenblum and other sources familiar with the CFPB believe the new 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 these expected lines, how might they impact credit unions' programs that offer a more consumer-friendly source for small dollar, short term loans?

Mike Wishnow, spokesman for the Pennsylvania Credit Union Association, predicted new rules that mandate ability to repay verification could hamper the ability of dozens of Pennsylvania credit unions to offer the PCUA's Better Choice loan program.

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

Jim Blaine, CEO of State Employees' Credit Union, headquartered in Raleigh, N.C., agreed with Wishnow that regulations along the lines that Rosenblum and others anticipate could end his credit union's very successful Salary Advance Loan program.

However, Blaine cited different reasons.

The leader of the $27 billion credit union explained the Federal Reserve told SECU about 10 years ago it could only attach a mandatory savings aspect to a loan program if the loan was repaid in a single payment.

So, if the CFPB mandates payday loans be repaid on an installment system, Blaine said, that might do away with the deposit aspect, and SECU would  not be interested in continuing its current program.

“From our perspective, this is really a savings program designed to 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 do that again.”

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

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

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