The CFPB referenced the NCUA in part of its proposed guidelines forpayday loans, which are the first step toward developing a paydaylending regulation.

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“We are releasing this outline to kick off our efforts tosolicit specific feedback from small entities that will be affectedby this rulemaking,” CFPB Director Richard Cordray wrote inprepared remarks for the opening of a March 26 field hearing inRichmond, Va.

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“As we are getting this feedback, we will also continue toconsult with consumers, industry and others,” he added. “We willthen formally issue a proposed rule and provide opportunity foreveryone to comment. We will move as quickly as we reasonably can,but we will be thoughtful and thorough as we continue this work, inaccordance with our best lights about how to address theseissues.”

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Under the guidelines for protecting consumers from long-termdebt traps, the CFPB said lenders could adopt the approach the NCUAhas put into place for payday alternative loans. This approachlimits the loans to between $200 and $1,000; caps the interest rateat 28% and the application fee at $20; and, forbids the loan if theconsumer has any other covered loans. It also limits the number ofloans to any one consumer to one at a time and no more than two insix months.

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The agency's guidelines and eventual regulation would coverpayday loans as well as vehicle title loans, so-called high costinstallment loans and open ended lines of credit.

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The CFPB's guidelines proposed two possible approaches topreventing lenders from trapping consumers in debt due to high-costshort- or long-term loans. Lenders could adopt a “prevention”approach that would require underwriting the loan to ascertainborrowers' ability to pay and limit the number of loans lenderscould make. Or lenders could limit loan amounts and the ability torollover a payday loan, and offer consumers who do roll over a loanan affordable “off ramp” out of the debt, which is usually a payover time element without fees.

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The guidelines will also propose lenders must notify borrowersat least three business days before submitting a paymenttransaction to the borrower's financial institution, and wouldlimit the number of times a lender could submit a charge forpayment.

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Read more: CUNA's Nussle issued a statement inreaction …

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CUNA took a guarded reaction to the proposal.

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“One of the goals of the founders of the American credit unionmovement was to create a system of cooperative finance thatprovided consumers with access to credit, including short-term,small dollar loans on fair terms and rates,” CUNA CEO JimNussle wrote in a prepared statement. “Therefore, CUNAsupports the ability of credit unions to provide beneficialshort-term, small loans as alternatives to predatorypayday lending, which has no place in the financialmarketplace.

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“The extent to which credit unions will be able to continue toproductively, efficiently and responsibly serve their members'short-term, small dollar credit needs will be a key measure we usein evaluating these proposals. If the rule results in consumershaving reduced access to credit from credit unions, or if theaccess to credit is made more expensive by regulatory burdensimposed on credit unions, which would be more appropriatelytargeted toward the abusers of consumers, it will have failed toadequately protect consumers. We are evaluating the proposals theBureau released overnight, and we look forward to discussing themwith our members, the CFPB and other policymakers,” Nussleadded.

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NAFCU took a similar wait and see attitude.

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“NAFCU and our members strongly support responsible short-termand long-term lending,” NAFCU Senior Vice President of GovernmentAffairs and General Counsel Carrie Hunt wrote in a preparedstatement. “We appreciate the CFPB looking at the practices ofactors in the marketplace that could harm consumers. As with anyrulemaking, NAFCU wants to ensure that there are no unintendedconsequences for credit unions. At first blush, the CFPB'sannouncement could touch upon many areas of lending and NAFCU willclosely review the CFPB's potential rulemaking ideas to avoid thoseunintended consequences.”

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The Consumer Federation of America, however, expressed moreapproval but joined with other organizations in believing theguidelines did not go far enough.

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The consumer group noted that in addition to the ability torepay requirements for shorter and longer-term loans, the proposalalso considers other options, such as offering lenders the optionto forgo the review of a borrower's income and expenses beforemaking a loan. It expressed particular concern about the guidelinesallowing lenders to make up to three back-to-back payday loans.This option serves as a stamp of approval for back-to-back lendingand could undermine stronger state protections, the organizationcharged.

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“This initial proposal suggests several different paths theBureau could pursue going forward,” said Tom Feltner, director offinancial services for CFA. “None of this is set in stone, butgiving lenders the option to make three loans in a row withoutrequiring a straight-forward, common-sense ability to repay reviewshould not be part of a final rule.”

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