Posts tagged ‘pal loans’

How A Federal Interest Rate Cap Would Impact Your Credit Union

There is no statute which provides a better example of legislative mission creep than the Military Lending Act. It was originally passed in 2007 to cap the interest rates that could be charged to high cost payday loans, vehicle title loans, and refund anticipation loans involving members of the military and their family members.

In 2016 its regulations were extended to include most consumer loan products including credit cards. Crucially, these regulations were coupled with a new Military Annual Percentage Rate (MAPR) which capped interest rates on these loans at 36%.

Now, to the surprise of absolutely no one, Senator Sherodd Brown of Ohio is championing legislation which would extend the protections afforded by this legislation to the American public writ large by giving America a 36% MAPR interest rate. Earlier this week, the Senator used NCUA Chairman Todd Harper’s appearance before the Committee to underscore the fact that credit unions function just fine with a 36% cap and even have statutory authority to offer Payday Alternative Loans, albeit with a 28% interest rate.

As the debate unfolds, a few facts are being overlooked. Most importantly, the 36% MAPR is not the same (see appendix in link) as a 36% interest rate calculated under the Truth and Lending Act and regulation Z. For example, the MAPR includes credit insurance premiums and credit related ancillary products. In contrast, such charges are generally not considered finance charges under regulation Z provided certain conditions are met.

These and other differences may not result in dramatic calculation differences but if imposed across the board they would raise a new host of compliance requirements. The last thing we need is thousands of pages of additional consumer lending regulations.

I would love to live in a world where short term loans would not have to be provided. But the evidence is overwhelming that there is a pressing and real demand for these loans. After all, more than half of Americans don’t have savings to cover even moderately expensive financial surprises. To supporters of this legislation, this is evidence of why reasonable caps should be imposed so that desperate borrowers aren’t held up by legal loan sharks.

Conversely, it is awfully tough to make a profit on short-term small dollar loans, unless your business is specifically designed to do so, which is why a whole industry has sprouted up to meet this demand.  While it’s true that credit unions can provide short term loans, according to the preamble accompanying proposed changes to the PAL regulations in 2018, less than 45% of FCUs choose to do so. The reality is, that despite the demand for short term loans it is extremely difficult for financial institutions to cost effectively provide short term loans that are attractive to the people who need them.

Count me in the group of crusty cynics who believe that capping interest rates will simply make short term loans more difficult to get and result in a larger, underground economy.  This is yet another example of an appealingly simplistic solution to a highly complicated problem.

August 6, 2021 at 9:09 am Leave a comment

NCUA Board Approves Important Changes

Okay, I know that headline does not exactly grab your attention, but I’ve only had one cup of coffee, and I wanted to convey that the NCUA had one of its most substantive get-togethers in months. What the Board did yesterday helps clarify the steps federal credit unions can take to deal with that disruptive member. It also gives you greater flexibility to provide payday alternative loans.

First, the PAL loans are getting all the attention, particularly since the proposal passed only after a dissenting vote by Board Member Todd Harper. But let’s not overreact here. Since 2010, NCUA has given credit unions authority to exceed the usury cap, provided they are offering members short-term loans as opposed to predatory payday loans. The problem is that the requirements are so restrictive that credit unions have been slow to embrace their authority. As of 2017, 518 FCUs reported offering PAL loans. With its actions yesterday, NCUA gave credit unions greater flexibility in offering these loans by, among other things, authorizing them to make loans up to $2,000 and doing away with a minimum loan amount requirement. I love this last change because it reflects the reality of what many credit unions do for their members: they give them what they need, not more. They have simply never classified it as a PAL loan before.

I know that there are blog readers out there who will be happy to know that NCUA has finalized the bylaw changes. Stylistically, I think creating a specific section of the bylaws dedicated to defining a “member in good standing” will make it easier for everyone to understand precisely what a member’s obligations are, and how he or she can lose some of the privileges of membership. In addition, codifying legal opinion letters explaining what steps credit unions can take against members behaving badly is long overdue. On the negative side, the new Section 5 definition of a member in “good standing” stipulates that you cannot limit services to a member “who is not significantly delinquent on any credit union loan…who has not caused a financial loss to this credit union.” This qualifier may create much angst for credit unions seeking to define what exactly constitutes a “significantly delinquent” member.

Incidentally, it seems that some credit union are a little gun shy when it comes to dealing decisively with members engaging in clearly inappropriate conduct. I love this summary in the preamble to yesterday’s bylaw amendments: “an FCU may take immediate action to address situations in which a member is violent, belligerent, disruptive, or poses a threat to the credit union, or other members, or its employees even if the FCU Act prohibits the FCU from immediately expelling the member.”

Finally, this regulation makes updates to audit requirements. There doesn’t seem to be any big changes here, but you should probably run this by whoever works with your supervisory committee.

On that note, enjoy your weekend.


September 20, 2019 at 9:41 am 1 comment

Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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