A divided NCUA board passed a rule Thursday that allows federal credit unions to make short-term loans of up to $2,000 as an alternative to predatory payday loans.
The new alternative payday loan option, known as PAL II, would not replace the current PAL model, but would provide credit unions with another lending option.
Board member Todd Harper voted against the proposal, saying the $2,000 loan limit was too high.
“It’s a bridge too far for me to climb,” he said, adding that a $2,000 loan was more like a personal loan than an alternative payday loan. He said the loan limit could push a cash-strapped family into a cycle of debt.
Board Chairman Rodney Hood said the loan alternative provided another option for pernicious payday lenders.
He said any small loan program “must strike a balance between flexibility and consumer protection.”
Federal regulators have explored ways to encourage borrowers to seek loans from traditional financial institutions rather than payday lenders, which many say lock borrowers into a cycle of indebtedness with fees and interest rates. high interest.
NCUA officials said the higher loan amount — the current PAL program has a $1,000 limit — would allow credit unions to meet demand for higher loan amounts and allow borrowers to pool multiple payday loans in one loan PAL II.
They said some organizations that filed comments on the $2,000 loan limit said the maximum loan was too high, while others said it was too low.
Board member J. Mark McWatters cited comments that the loan was too low and should be higher, adding that the board will continue to review the issue of short-term loans.
The final rule:
- Allows a federal credit union to provide a PAL II loan of up to $2,000.
- Establishes a loan term of at least one month with a maximum maturity of 12 months.
- Sets a maximum interest rate of 28%, the same as the original PAL program.
- Allows a federal credit union to issue a PAL II loan immediately after a borrower becomes a member of the credit union.
- Allows a federal credit union to issue only one type of PAL loan to a borrower at any given time.
- Prohibits a federal credit union from charging overdraft fees in connection with a loan drawn from a borrower’s account.
- Allows a credit union to charge a maximum application fee of $20.
- Allows a federal credit union to set its own underwriting standards.
- Allows borrowers to take out a maximum of three PAL II loans over a six-month period.
During Thursday’s meeting, the board also adopted final rules governing oversight committee audits and federal credit union bylaws.
Also on Thursday, the board was told that credit union liquidations had cost the Share Insurance Fund $41.5 million this year.