Payday Alternative Loans
| Published date | 01 October 2019 |
| Citation | 84 FR 51942 |
| Record Number | 2019-20821 |
| Section | Rules and Regulations |
| Court | National Credit Union Administration |
Federal Register, Volume 84 Issue 190 (Tuesday, October 1, 2019)
[Federal Register Volume 84, Number 190 (Tuesday, October 1, 2019)]
[Rules and Regulations]
[Pages 51942-51952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20821]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 701
RIN 3133-AE84
Payday Alternative Loans
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: The NCUA Board (Board) is issuing a final rule (referred to as
the PALs II rule) to allow federal credit unions (FCUs) to offer
additional payday alternative loans (PALs) to their members. The final
rule does not replace the NCUA's current PALs rule (referred to as the
PALs I rule). Rather, the PALs II rule grants FCUs additional
flexibility to offer their members meaningful alternatives to
traditional payday loans while maintaining many of the key structural
safeguards of the PALs I rule.
DATES: The final rule is effective on December 2, 2019.
FOR FURTHER INFORMATION CONTACT: Matthew Biliouris, Director, Office of
Consumer Financial Protection; Joseph Goldberg, Director, Division of
Consumer Compliance Policy and Outreach, Office of Consumer Financial
Protection; or Marvin Shaw, Staff Attorney, Division of Regulations and
Legislation, Office of General Counsel; 1775 Duke Street, Alexandria,
VA 22314-6113 or telephone: (703) 518-1140 (Messrs. Biliouris and
Goldberg), or (703) 518-6540 (Mr. Shaw).
SUPPLEMENTARY INFORMATION:
I. Background
II. Summary of Comments
III. Summary of the Final Rule
IV. Statement of Legal Authority
V. Section-by-Section Analysis
VI. Regulatory Procedures
I. Background
Federal credit unions (FCUs) provide individuals of modest means
access to affordable credit for productive and provident purposes.\1\
This core credit union mission puts FCUs in natural competition with
short-term, small-dollar lenders that offer payday, vehicle title, and
other high-cost installment loans to borrowers of modest means.\2\
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\1\ See Credit Union Membership Access Act, Public Law 105-219,
section 2, 112 Stat. 913 (Aug. 7, 1998) (codified as 12 U.S.C. 1751
note).
\2\ Roy F. Bergengren, Co[ouml]perative Credit, 191 The Annals
of the American Academy of Political and Social Science 144-148
(1937).
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A ``payday loan'' generally refers to a short-term, small-dollar
loan repayable in one or more installments with repayment secured by a
pre- or post-dated check or a preauthorized electronic fund transfer
(EFT) from the borrower's checking account.\3\ A payday loan usually
matures in 14 days, around the borrower's next payday, at which time
the borrower is often required to repay the loan in a single balloon
payment. The borrower typically does not pay interest on a payday loan.
Rather, payday lenders charge high ``application'' fees relative to the
amount borrowed, which typically range between $15 and $35 per 100
borrowed.\4\ This pricing structure produces a triple-digit annual
percentage rate (APR).\5\
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\3\ Robert W. Snarr, Jr., Fed. Reserve Bank of Phila., No Cash
`til Payday: The Payday Lending Industry, Compliance Corner (1st
Quarter 2002) available at www.philadelphiafed.org/bank-resources/publications/compliance-corner/2002/first-quarter/q1cc1_02.cfm.
\4\ See National Consumer Law Center, Consumer Credit Regulation
403-6 (1st ed. 2012).
\5\ The ``annual percentage rate'' is a ``measure of the cost of
credit, expressed as a yearly rate.'' 12 CFR 1026.14(a).
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Despite marketing payday loans as a temporary lifeline to
borrowers, most payday lenders refinance or ``rollover'' the borrower's
initial payday loan charging additional fees without a significant
economic benefit to the borrower. In fact, the Center for Responsible
Lending estimates that 76 percent of payday loans are rollovers.\6\
Borrowers most often rollover a payday loan because the borrower does
not have the ability to repay the initial loan upon maturity or will
have limited funds to meet other obligations.\7\ This pattern of
repeated borrowings creates a ``cycle of debt'' that can increase the
borrower's risk of becoming unbanked, filing for bankruptcy, or
experiencing severe financial hardship.\8\
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\6\ Uriah King & Leslie Parrish, Center for Responsible Lending,
Phantom Demand: Short-Term Due Date Generates 76% of Total Volume 15
(July 2009) available at www.responsiblelending.org/payday-lending/research-analysis/phantom-demand-short-term-due-date-genderates-need-for-repeat-payday-loans-accounting-for-76-of-total-volume.html.
\7\ Id.
\8\ Id.
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2010 Payday Alternative Loan Rulemaking (PALs I Rule)
In 2010, the Board amended the NCUA's general lending rule, Sec.
701.21, to provide a regulatory framework for FCUs to make viable
alternatives to payday loans, the PALs I rule.\9\ The PALs I rule,
Sec. 701.21(c)(7)(iii), permits an FCU to offer to its members a PAL
loan, a form of closed-end consumer credit, at a higher APR than other
credit union loans as long as the PAL has certain structural features,
developed by the Board, to protect borrowers from predatory payday
lending practices that can trap borrowers in repeated borrowing cycles.
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\9\ Short-Term, Small Amount Loans, 75 FR 58285 (Sept. 24,
2010).
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For example, the PALs I rule eliminates the potential for ``loan
churning,'' the practice of inducing a borrower to repay an existing
loan with another loan without significant economic benefit to the
borrower, by prohibiting an FCU from rolling one PALs I loan into
another PALs I loan.\10\ As the Board previously explained, ``these
provisions of the [PALs I rule] will work to curtail a member's
repetitive use and reliance on this type of product, which often
compounds the member's already unstable financial condition . . . The
Board recognizes that continuously `rolling-over' a loan can subject a
borrower to additional fees and repayment amounts that are
substantially more than the initial amount borrowed.'' \11\ However, to
avoid the possibility of a default in cases where the borrower cannot
repay the initial PAL loan, an FCU may extend the maturity of an
existing PALs I loan to the maximum term limit permissible under the
regulation as long as the borrower does not pay any additional fees or
receive additional credit. An FCU may also refinance a traditional
payday loan into a PALs I loan.\12\
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\10\ 12 CFR 701.21(c)(7)(iii)(A)(4).
\11\ Short-Term, Small Amount Loans, 75 FR 24497, 24499 (May 5,
2010).
\12\ Short-Term, Small Amount Loans, 75 FR 58285, 58286 (Sept.
24, 2010).
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The PALs I rule also eliminates the underlying borrower payment
shock from a single balloon payment, which often forces a borrower to
rollover a payday loan, by requiring that each PAL loan fully amortize
over the life of the loan.\13\ As the Board previously stated in the
preamble to the final PALs I rule, ``balloon payments often create
additional difficulty for borrowers trying to repay their loans, and
requiring FCUs to fully amortize the loans will allow borrowers to make
manageable payments over the term of the loan, rather than trying to
make one large payment.'' \14\ Accordingly, an FCU must structure a
PALs I loan so that a member repays principal and interest in
[[Page 51943]]
approximately equal installments on a periodic basis until loan
maturity.\15\ While the Board does not prescribe a specific payment
schedule--e.g., bi-weekly or monthly--the Board expects an FCU to
structure the repayment of each PALs I loan to ensure that the member
has a reasonable ability to repay the loan without the need for another
PALs I loan or traditional payday loan. Accordingly, an FCU may not
require that a borrower repay a PAL loan using a single balloon
payment.
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\13\ 12 CFR 701.21(c)(7)(iii)(A)(5).
\14\ Short-Term, Small Amount Loans, 75 FR 58285, 58287 (Sept.
24, 2010).
\15\ Id.
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Moreover, the PALs I rule removes the economic incentive for an FCU
to encourage a borrower to take out multiple PALs I loans by limiting
the permissible fees that an FCU may charge that borrower to a
reasonable application fee.\16\ The non-credit union payday lending
business model depends on repeated borrowings from a single borrower of
small dollar amounts with high fees and associated charges. A
traditional payday lender has every incentive to make multiple payday
loans to that borrower to maximize the profitability of that
relationship at the expense of the borrower. By limiting the scope of
permissible fees, the PALs I rule realigns economic incentives to
encourage an FCU to provide a PALs I loan as a pathway towards
mainstream financial products and services rather than as a separate
profit center for the credit union.
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\16\ 12 CFR 701.21(c)(7)(iii)(A)(3).
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The Board recognizes that the PALs I rule contains recommended best
practices that, when exercised in conjunction with a PALs I loan, help
put credit union members on the pathway to mainstream financial
products and services. This includes reporting to credit reporting
agencies and providing financial education. As of December 2018, almost
eighty-five percent of FCUs reported sharing PALs I loan information
with credit reporting agencies and nearly forty-five percent reported
providing financial education services to PALs I loan borrowers. The
Board commends FCUs for undertaking these additional steps to assist
their members.
2012 Payday Alternative Loan Advanced Notice of Proposed Rulemaking
(PALs I ANPR)
As part of the 2010 rule making process, the Board indicated that
it would review PALs I loan data collected on FCU call reports after
one year to reevaluate the requirements of the PALs I rule.\17\ As of
September 2011, 372 FCUs offered PALs I loans with an aggregate balance
of $13.6 million or 36,768 outstanding loans. Six months later, as of
March 31, 2012, approximately 386 FCUs reported offering PALs I loans
with an aggregate balance of $13.5 million on 38,749 outstanding loans.
While the Board acknowledged at that time that some FCUs might make an
independent business decision not to offer PALs I loans, it
nevertheless sought to increase the number of FCUs making PALs I loans
in a meaningful way and to ensure that all FCUs that chose to offer
PALs I loans were able to recover the costs associated with making
these types of loans.
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\17\ 75 FR 58285, 58288 (Sept. 24, 2010).
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For that reason, the Board issued an advanced notice of proposed
rulemaking (PALs I ANPR) seeking comments on specific aspects of the
PALs I rule at its September 2012 meeting.\18\ These questions
included, but were not limited to, asking whether the Board should
allow an FCU to charge a higher application fee, whether the Board
should increase the permissible PALs I loan interest rate, and whether
the Board should expand the maximum permissible loan amount. The Board
also asked commenters to provide information on any small dollar,
short-term loans offered outside of the PALs I rule.
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\18\ Payday-Alternative Loans, 77 FR 59346 (Sept. 27, 2012).
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The Board received comments from trade organizations, state credit
union leagues, consumer advocacy groups, lending networks, private
citizens, and FCUs suggesting changes to at least one aspect of the
PALs I rule. However, these commenters offered no consensus regarding
which aspects of the PALs I rule the Board should modify. Consequently,
the Board chose not to undertake any changes to the PALs I rule at that
time.
2018 Payday Alternative Loan II Notice of Proposed Rulemaking (PALs II
NPRM)
In May 2018, the Board approved a notice of proposed rulemaking to
amend the NCUA's general lending rule to allow FCUs to make an
additional viable alternative to predatory payday loans (PALs II
NPRM).\19\ As of December 2017, 518 FCUs reported offering PALs I loans
with 190,723 outstanding loans and an aggregate balance of $132.4
million.\20\ These figures represent a significant increase in loan
volume from 2012 when the Board issued the PALs I ANPR. However, the
number of FCUs offering these products has only grown modestly.
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\19\ Payday Alternative Loans, 83 FR 25583 (June 4, 2018).
\20\ As of December 2018, 606 FCUs reported offering PALs I
loans with 211,589 outstanding loans and an aggregate balance of
$145.2 million.
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The purpose of the PALs II NPRM was to provide FCUs with additional
flexibility to offer PALs loans to their members. The PALs II NPRM did
not propose to replace the PALs I rule. Rather, it allowed an FCU to
offer a more flexible PALs loan while retaining key structural features
of the PALs I rule designed to protect consumers from predatory payday
lending practices, including restrictions on permissible fees,
rollovers, and amortization. The Board intended the PALs I rule and
proposed PALs II rule to create distinct products (referred to in this
document, respectively, as PALs I and PALs II loans) that must satisfy
similar regulatory requirements tailored to the unique aspects of each
product.
Features Incorporated From the PALs I Rule
The PALs II NPRM proposed to incorporate many of the structural
features of the PALs I rule designed to protect borrowers from
predatory payday lending practices. Those features included a
limitation on rollovers, a requirement that each PALs II loan must
fully amortize over the life of the loan, and a limitation on the
permissible fees that an FCU may charge a borrower related to a PALs II
loan. An FCU would also have had to structure each loan as closed-end
consumer credit. As discussed in more detail below, the PALs II NPRM
modified other features of the PALs I rule for PALs II loans. The
purpose of these modifications was to encourage additional FCUs to
offer PALs II loans as an alternative to predatory payday loans and to
meet the needs of certain payday loan borrowers that may not be met by
PALs I loans.
Loan Amount
The PALs II NPRM proposed to allow an FCU to make a PALs II loan
for a loan amount up to $2,000 without any minimum loan amount. The
PALs I rule currently limits PALs I loan amounts to a minimum of $200
and a maximum of $1,000.\21\ The PALs II NPRM noted that allowing a
higher loan amount would give an FCU the opportunity to meet increased
demand for higher loan amounts from payday loan borrowers and provide
some borrowers with an opportunity to consolidate multiple payday loans
into one PALs II loan. The Board was particularly interested in
allowing a sufficient loan amount to encourage borrowers to consolidate
[[Page 51944]]
payday loans into PALs II loans to create a pathway to mainstream
financial products and services offered by credit unions.
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\21\ See 12 CFR 701.21(c)(7)(iii)(A)(1).
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Loan Term
Consistent with the proposal to increase the permissible loan
amount to $2,000, the PALs II NPRM proposed increasing the maximum loan
term for a PALs II loan to 12 months. The PALs I rule currently limits
PALs I loan maturities to a maximum term of 6 months.\22\ The increased
loan term would allow a borrower sufficient time to repay their loans,
thereby avoiding the types of borrower payment shock common in the
payday lending industry that force borrowers to repeatedly rollover
payday loans. The PALs II NPRM noted that an FCU would be free to
choose an appropriate loan term, provided the loan fully amortized, and
encouraged FCUs to select loan terms that were in the best financial
interests of PALs II borrowers.
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\22\ See 12 CFR 701.21(c)(7)(iii)(A)(2).
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Membership Requirement
The PALs II NPRM also proposed to allow an FCU to offer a PALs II
loan to any member regardless of the length of membership. The PALs I
rule currently requires a borrower to be a member of the credit union
for at least one month before receiving a PALs I loan.\23\ The PALs II
NPRM eliminated the membership time requirement to allow an FCU to make
a PALs II loan to any member borrower that needed access to funds
immediately and would otherwise turn to a payday lender to meet that
need. Nevertheless, the PALs II NPRM still encouraged FCUs to consider
a minimum membership requirement as a matter of prudent underwriting.
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\23\ See 12 CFR 701.21(c)(7)(iii)(A)(6).
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Number of Loans
Finally, the PALs II NPRM proposed to remove the restriction on the
number of PALs II loans that an FCU may make to a single borrower in a
rolling 6-month period. The PALs I rule currently prohibits an FCU from
making more than three PALs loans in a rolling 6-month period to a
single borrower.\24\ An FCU also may not make more than one PALs I loan
to a borrower at a time. The Board suggested removing the rolling 6-
month requirement for PALs II loans to provide FCU's with maximum
flexibility to meet borrower demand. However, the PALs II NPRM proposed
to retain the requirement from the PALs I rule that an FCU can only
make one loan at a time to any one borrower. Accordingly, the PALs II
NPRM did not allow an FCU to provide more than one PALs product,
whether a PALs I or PALs II loan, to a single borrower at a given time.
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\24\ See 12 CFR 701.21(c)(7)(iii)(A)(3).
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Request for Additional Comments
In addition to the proposed PALs II framework, the PALs II NPRM
asked general questions about PAL loans, including whether the Board
should prohibit an FCU from charging overdraft fees for any PAL loan
payments drawn against a member's account. The PALs II NPRM also asked
questions, in the nature of an ANPR, about whether the Board should
create an additional kind of PAL loan, referred to as PALs III, which
would be even more flexible than what the Board proposed in the PALs II
NPRM. Before proposing a PALs III loan, the PALs II NPRM sought to
gauge industry demand for such a product, as well as solicit comment on
what features and loan structures should be included in a PALs III
loan.
II. Summary of Comments on the PALs II NPRM
The Board received 54 comments on the PALs II NPRM from 5 credit
union trade organizations, 17 state credit union leagues, 5 consumer
advocacy groups, 2 state and local governments, 2 charitable
organizations, 2 academics, 2 attorneys, 3 credit union service
organizations, 14 credit unions, and 2 individuals. A majority of the
commenters supported the Board's proposed PALs II framework but sought
additional changes to provide FCUs with more regulatory flexibility.
These commenters focused on ways to increase the profitability of PALs
loans such as by allowing FCUs to make larger loans with longer
maturities, or charge higher fees and interest rates.
Some commenters strongly opposed the proposed PALs II framework.
These commenters argued that the proposed framework could blur the
distinction between PALs and predatory payday loans, which could lead
to greater consumer harm. One commenter in particular argued that the
Board has not fully explained why the proposed PALs II framework will
encourage more FCUs to offer PALs loans to their members. Instead,
these commenters urged the Board to focus on methods to curtail
predatory lending by credit unions outside of the PALs I rule and to
address potential abuses regarding overdraft fees.
Most commenters offered at least some suggestions on the creation
of a PALs III loan. An overwhelming majority of these comments related
to increasing the allowable interest rate for PALs III loans and giving
FCUs greater flexibility to charge a higher application fee. The
commenters that were opposed to the proposed PALs II framework
similarly were opposed to the creation of a PALs III loan for the
reasons noted above.
III. Summary of Final Rule
With the exception of reconsidering the proposed removal of the
limit on the number of PAL loans in a rolling 6-month period, the Board
is adopting the PALs II framework largely as proposed in the PALs II
NPRM. The requirements for PALs II loans will be set out in a new
paragraph of the NCUA's general lending rule, Sec. 701.21(c)(7)(iv).
The final rule allows an FCU to offer a PALs II loan to a member for
any amount up to a maximum loan amount of $2,000. The PALs II loan must
carry a loan term of at least 1 month with a maximum loan maturity of
12 months. The FCU may make such a loan immediately upon the borrower
establishing membership in the credit union. However, an FCU may only
offer one type of PALs loan to a member at any given time. All other
requirements of the PALs I rule will continue to apply to PALs II loans
including the prohibition against rollovers, the limitation on the
number of PALs loans that an FCU can make to a single borrower in a
given period, and the requirement that each PALs II loan fully amortize
over the life of the loan.
Additionally, the final rule prohibits an FCU from charging any
overdraft or non-sufficient funds (NSF) fees in connection with any
PALs II loan payment drawn against a borrower's account. This includes
overdraft fees or NSF fees that an FCU could assess against the
borrower for paying items presented for payment after the PALs II loan
payment creates a negative balance in the borrower's account. As
discussed below, while the Board believes that reasonable and
proportional fees assessed in connection with an overdraft loan are
appropriate in most cases to compensate an FCU for providing an
important source of temporary liquidity to borrowers, the Board has
serious fairness concerns regarding this practice in connection with
PAL loans given the unique characteristics of payday loan borrowers and
the Board's stated goal of putting individuals on a path to mainstream
financial products and services.
Lastly, the final rule does not take any immediate action with
regard to PALs III loans. The Board has taken the comments regarding a
PALs III loan under advisement and will determine whether future action
is necessary.
[[Page 51945]]
IV. Statement of Legal Authority
The Board is issuing this final rule pursuant to its plenary
regulatory authority to administer the Federal Credit Union Act (FCU
Act) \25\ and its specific authority to adopt rules and regulations
that it deems necessary or appropriate to ensure the safety and
soundness of the credit union system and the National Credit Union
Share Insurance Fund (NCUSIF).\26\ Given the historic mission of credit
unions to serve individuals of modest means, the importance of
providing these individuals with a realistic pathway towards mainstream
financial products and services, and the high fixed costs associated
with offering viable alternatives to payday loans, this final rule is
an appropriate exercise of the Board's regulatory authority.
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\25\ 12 U.S.C. 1766(a).
\26\ 12 U.S.C. 1789(a)(11).
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V. Section-by-Section Analysis
Because the PALs II NPRM proposed to apply many of the requirements
of the PALs I rule to PALs II loans, the Board received numerous
comments regarding the PALs I rule. The Board addresses those comments
below in a section-by-section analysis of the PALs I rule, Sec.
701.21(c)(7)(iii). With the exception of one clarification regarding
the aggregate concentration limit set out in Sec.
701.21(c)(7)(iii)(A)(8), the Board is not adopting any changes to the
PALs I rule. However, in response to questions raised by several
commenters, the Board does provide additional guidance below regarding
application fees and underwriting criteria. Specific comments related
to the PALs II NPRM are discussed in the section-by-section analysis of
Sec. 701.21(c)(7)(iv), which contains the new PALs II rule.
Section 701.21(c)(7)(iii)--Payday Alternative Loans (PALs I)
Section 701.21(c)(7)(iii)(A)--Minimum Requirements for PALs I
Section 701.21(c)(7)(iii)(A) permits an FCU to charge an interest
rate that is 1000 basis points above the usury ceiling established by
the Board under the NCUA's general lending rule. The current usury
ceiling is 18 percent inclusive of all finance charges.\27\ For PALs I
loans, this means that the maximum interest rate that an FCU may charge
for a PAL is currently 28 percent inclusive of all finance charges.
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\27\ Historically, the Board has interpreted the term ``finance
charge'' in the NCUA's general lending rule consistently with that
term in the Truth in Lending Act, 15 U.S.C. 1601 et seq., and the
Consumer Financial Protection Bureau's implementing regulation,
Regulation Z, 12 CFR part 1026. See e.g. Payday Lending, Letter to
Federal Credit Unions 09-FCU-05 (July 2009) (``NCUA's long standing
policy has been to look to the definition of `finance charge' in
Regulation Z'').
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Many commenters requested that the Board increase the maximum
interest rate that an FCU may charge for a PALs loan to 36 percent.
These commenters noted that a 36 percent maximum interest rate would
mirror the rate used by the Consumer Financial Protection Bureau (CFPB
or Bureau) to determine whether certain high-cost loans are ``covered
loans'' within the meaning of the Bureau's Payday, Vehicle Title, and
Certain High-Cost Installment Loans Rule (payday lending rule) \28\ and
maximum interest rate allowed for active duty service members under the
Military Lending Act,\29\ providing a measure of regulatory uniformity
for FCUs offering PALs loans. These commenters also argued that
increasing the maximum interest rate to 36 percent would allow FCUs to
compete more effectively with insured depository institutions and
payday lenders for market share in this market.
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\28\ 12 CFR 1041.3(b)(3)(i).
\29\ 10 U.S.C. 987; 32 CFR part 232.
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In contrast, two commenters argued that a 28 percent interest rate
is sufficient for FCUs. These commenters stated that on higher dollar
loans with longer maturities, the current maximum interest rate of 28
percent is enough to allow an FCU to make PALs loans profitably.
Another commenter noted that many credit unions are able to make PALs
loans profitably at 18 percent, which it believed is evidence that the
higher maximum interest rate is unnecessary.
Since the Board originally adopted the PALs I rule, it has observed
substantial ongoing changes in the payday lending marketplace. Given
all of these developments, the Board does not believe it is appropriate
to adjust the maximum interest rate for PALs loans, whether a PALs I
loan or PALs II loan, without further study. Furthermore, the Board
notes that both the Bureau's payday lending rule and the Military
Lending Act use an all-inclusive interest rate limit that may or may
not include some of the fees, such as an application fee, that are
permissible for PALs loans. Accordingly, the Board will continue to
consider the commenters' suggestions and may revisit the maximum
interest rate allowed for PALs loans if appropriate.
Section 701.21(c)(7)(iii)(A)(3)
Section 701.21(c)(7)(iii)(A)(3) limits the number of PALs I loans
that an FCU can make to three in a rolling 6-month period to any one
borrower. An FCU also may not make more than one PALs I loan at a time
to a borrower. To account for the adoption of the PALs II rule, the
final rule amends this section to clarify that an FCU may not offer
more than one PALs loan, whether a PALs I or PALs II loan, to a
borrower at a time.
Some commenters argued that the limitation on the number of PALs
loans that a borrower may receive at a given time would force borrowers
to take out a payday loan if the borrower needs additional funds.
However, the Board believes that this limitation places a meaningful
restraint on the ability of a borrower to take out multiple PALs loans
at an FCU, which could jeopardize the borrower's ability to repay each
of these loans. While a pattern of repeated or multiple borrowings may
be common in the payday lending industry, the Board believes that
allowing FCUs to engage in such a practice would defeat one of the
purposes of PALs loans, which is to provide borrowers with a pathway
towards mainstream financial products and services offered by credit
unions.
Section 701.21(c)(7)(iii)(A)(7)
Section 701.21(c)(7)(iii)(A)(7) permits an FCU to charge a
reasonable application fee, not to exceed $20, to all members applying
for a PALs I loan. The Board interprets the term ``application fee,''
as used in the PALs I rule, consistently with that of the CFPB's
Regulation Z. Accordingly, in order to qualify as an ``application
fee'' under the PALs I rule, an FCU must use the charge to recover
actual costs associated with processing an individual application for
credit such as credit reports, credit investigations, and
appraisals.\30\ An application fee that exceeds the actual cost of
processing a borrower's application is a finance charge under
Regulation Z that must be included in the APR and measured against the
usury ceiling in the NCUA's rules.\31\
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\30\ 12 CFR 1026.4(c)(1).
\31\ See 12 CFR part 1026, Supp. I, comment 4(c)(1)-1.
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In response to the PALs II NPRM, several commenters argued that the
current application fee limit of $20 is too low to allow an FCU to
recover the actual costs of processing applications. The majority of
these commenters recommended that the Board set the application fee
limit between $40 and $50 to create an incentive for more FCUs to offer
PALs loans to their members. Because of the limited underwriting
involved with a PALs loan, the Board does not believe that an
[[Page 51946]]
application fee limit between $40 and $50 is appropriate. While one
commenter provided a revenue model to help illustrate the potential
cost of making a PALs loan, a majority of the commenters have not
provided sufficient data to support their conclusion that the $20
application fee limit is too low to allow any FCU to recover the actual
costs of processing applications. Furthermore, the Board believes that
an increased application fee limit creates unnecessary potential for
abuse by an FCU that may use a higher application fee as concealed
interest to compensate the credit union for the risk of loss associated
with making a PALs loan.
Other commenters asked the Board to clarify whether an application
fee may reflect staff and technology costs, investing in loan
processing automation, third-party service provider costs, and
advertising. As noted above, the Board interprets the term
``application fee'' in the PALs I rule consistently with Regulation Z.
An application fee must reflect the actual and direct costs associated
with processing an individual application. While certain third-party
service provider costs may be included in the application fee,
especially if the FCU offers a PALs loan through a third-party vendor
and passes any costs associated with using that vendor onto the member
borrower, the Board does not believe that other costs, such as
investing in loan processing automation or advertising costs, are
actual and direct costs associated with processing a borrower's
application. Rather, these costs are general business expenses incurred
as part of credit union operations and do not relate to costs
specifically incurred processing a borrower's PALs loan application.
One commenter stated that the Board should only permit one
application fee per year. This commenter argued that the limited
underwriting of a PALs loan does not justify allowing an FCU to charge
an application fee for each PALs loan. Another commenter similarly
requested that the Board adopt some limit on the number of application
fees that an FCU may charge for PALs loans in a given year. The Board
appreciates the commenters concerns about the burden excessive fees
place on borrowers. This is particularly relevant in this area.
However, the Board must balance the need to provide a safe product for
borrowers with the need to create sufficient incentives to encourage
FCUs to make PALs loans. The Board believes that its current approach
of allowing FCUs to charge a reasonable application fee, consistent
with Regulation Z, which does not exceed $20, provides the appropriate
balance between these two objectives.
Several commenters also suggested that the Board permit an FCU to
charge a monthly service fee for PALs loans. As noted above, the Board
interprets the term ``finance charge,'' as used in the FCU Act,
consistently with Regulation Z. A monthly service fee is a finance
charge under Regulation Z.\32\ Consequently, the monthly service fee
would be included in the APR and measured against the usury ceiling in
the NCUA's rules. Therefore, while the PALs I rule does not prohibit an
FCU from charging a monthly service fee, the Board believes that such a
fee will be of little practical value to an FCU because any monthly
service fee income likely would reduce the amount of interest income an
FCU could receive from the borrower or would push the APR over the
applicable usury ceiling.
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\32\ See 12 CFR 1026.4(b)(2).
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Section 701.21(c)(7)(iii)(A)(8)
Section 701.21(c)(7)(iii)(A)(8) requires an FCU to include a limit
on the aggregate dollar amount of PALs I loans in its written lending
policies. Under no circumstances may the total amount of PALs I loans
be greater than 20 percent of the FCU's net worth. This provision also
requires an FCU to adopt appropriate underwriting guidelines to
minimize the risks related to PALs I loans. A set of best practices for
PALs I loan underwriting is included as guidance in Sec.
701.21(c)(7)(iii)(B)(2).
The final rule amends Sec. 701.21(c)(7)(iii)(A)(8) to clarify that
the 20 percent aggregate limit applies to both PALs I and PALs II
loans. The Board adopted this limit in the PALs I rule as a precaution
to avoid unnecessary concentration risk for FCUs engaged in this type
of activity. While the Board indicated that it might consider raising
the limit later based on the success of FCU PAL programs, the Board has
insufficient data to justify increasing the aggregate limit for either
PALs I or PALs II loans at this time. Rather, based on the increased
risk to FCUs related to high-cost, small-dollar lending, the Board
believes that the 20 percent aggregate limit for both PALs I and PALs
II loans is appropriate. The final rule includes a corresponding
provision in Sec. 701.21(c)(7)(iv)(8) to avoid any confusion regarding
the applicability of the aggregate limit to PALs I and PALs II loans.
Many commenters asked the Board to exempt low-income credit unions
(LICUs) and credit unions designated as community development financial
institutions (CDFIs) from the 20 percent aggregate limit for PALs
loans. These commenters argued that making PALs loans is part of the
mission of LICUs and CDFIs and, therefore, the Board should not hinder
these credit unions from making PALs loans to their members. Another
commenter requested that the Board eliminate the aggregate limit for
PALs loans entirely for any FCU that offers PALs loans to their
members. The Board did not raise this issue in the PALs II NPRM.
Accordingly, the Board does not believe it would be appropriate under
the Administrative Procedure Act to consider these requests at this
time. However, the Board will consider the commenters' suggestions and
may revisit the aggregate limit for PALs loans in the future if
appropriate.
Other commenters to the PALs II NPRM asked for clarification
regarding the underwriting criteria that an FCU must use in connection
with a PALs loan. Specifically, commenters requested guidance on
whether an FCU should consider a borrower's debt burden in addition to
monthly income or deposit activity when making a PALs loan. The Board
has not historically required specific underwriting standards for PALs
loans. Rather, the Board has allowed an FCU to develop its own lending
policies based on its risk tolerance.\33\ At a minimum, however, the
Board has recommended that an FCU develop underwriting standards that
``account for a member's need for quickly available funds, while
adhering to principles of responsible lending.'' \34\ This includes
examining a borrower's ``proof of employment or income, including at
least two recent paycheck stubs'' to determine a borrower's repayment
ability as well as ``developing standards for maturity lengths and loan
amounts so a borrower can manage repayment of the loan.'' \35\
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\33\ See Short-Term, Small Amount Loans, 75 FR 58285, 58288
(Sept. 24, 2010).
\34\ 12 CFR 701.21(c)(7)(iii)(B)(2).
\35\ Id.
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The Board continues to believe that an FCU is in the best position
to develop its own underwriting standards based on its risk tolerance
as long as those standards are consistent with responsible lending
principles. While the Board has historically only provided guidance on
minimum standards for determining a borrower's recurring income as the
key criteria for eligibility for a PALs loan, that does not mean that
an FCU may ignore a borrower's debt burden when determining whether to
grant a PALs loan. Rather, the FCU must consider the borrower's entire
financial position, including debt burden, and make an informed
judgment consistent
[[Page 51947]]
with responsible lending principles regarding whether to extend a PALs
loan to a borrower. Accordingly, the FCU should conduct some inquiry
into whether the borrower can manage to repay the PALs loan without the
need for additional PALs loans or traditional payday loans. When
considering the application of a member with prior a history at the
credit union, a review of credit and debit activity in their account
may be sufficient to make this determination.
Section 701.21(c)(7)(iv)--Payday Alternative Loans (PALs II)
The final rule creates a new provision, Sec. 701.21(c)(7)(iv),
that sets forth the requirements for PALs II loans. In the PALs II
NPRM, a majority of commenters asked that the Board combine the PALs I
rule and proposed PALs II rule together in a single PALs regulation.
Most of the commenters argued strongly that one PALs loan regulation
would reduce confusion and provide FCUs with greater flexibility to
structure their PAL programs in ways that best serve their members.
A small number of commenters raised serious concerns regarding the
applicability of the CFPB's payday lending rule \36\ should the Board
adopt any changes to the PALs I rule. The CFPB's payday lending rule
establishes consumer protections for certain high-cost credit products,
including payday loans, and deems some credit practices related to
those products to be unfair or abusive in violation of the Consumer
Financial Practices Act.\37\ However, the CFPB's payday lending rule
provides a ``safe harbor'' for any loan that is made by an FCU in
compliance with the PALs I rule with an explicit cross-reference to
Sec. 701.21(c)(7)(iii).\38\ These commenters argued that any changes
to the PALs I rule may eliminate the safe harbor for FCUs in the CFPB's
rule. To allow FCUs to continue to avail themselves of the safe harbor,
the commenters requested that the Board adopt the PALs II rule as a
separate provision within the NCUA's general lending rule.\39\
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\36\ 12 CFR part 1041.
\37\ See 12 CFR 1041.1(b) (purpose).
\38\ 12 CFR 1041.3(e)(4).
\39\ In addition, as noted in the NPRM, the CFPB's current
payday lending rule conditionally exempts ``alternative loans,''
which covers loans that meet certain PALs I requirements. The Board
notes that the CFPB's rule does not include the minimum membership
period or limitation on the number of loans in a six-month period
among the criteria for the exemption. The Board's decision to limit
the number of loans that may be made in a six-month period does not
affect this exemption because the CFPB's rule does not include the
number of loans as a criterion for the exemption.
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The CFPB has proposed amendments to certain aspects of its payday
lending rule.\40\ Because the regulatory landscape with respect to
payday lending remains somewhat uncertain until the Bureau completes
the rulemaking process, the Board believes that adopting the PALs II
rule as a separate provision within the NCUA's general lending rule is
appropriate at this time to preserve the availability of the safe
harbor for FCUs that offer PALs loans that conform to the requirements
of the PALs I rule.
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\40\ Payday, Vehicle Title, and Certain High-Cost Installment
Loans, 84 FR 4252 (Feb. 14, 2019).
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Membership Requirement
Current Sec. 701.21(c)(7)(iii)(A)(6) requires a borrower to be a
member of an FCU for at least one month before the FCU can make a PALs
I loan to that borrower.\41\ However, an FCU may establish a longer
period as a matter of business judgment. The PALs II NPRM proposed to
remove this minimum membership time requirement for PALs II loans. The
purpose of this change was to allow an FCU to make a PAL II loan to any
member borrower that needs access to funds immediately and would
otherwise turn to a payday lender to meet that need.
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\41\ 12 CFR 701.21(c)(7)(iii)(A)(6).
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Many of the commenters that addressed this issue favored removing
the minimum membership time requirement with respect to PALs II loans.
These commenters argued that this change would provide an FCU with the
flexibility necessary to serve member borrowers that need immediate
access to temporary liquidity who might otherwise turn to a payday
lender. In contrast, a few commenters argued against this change,
noting that that a minimum membership requirement is a prudent lending
practice that helps an FCU establish a meaningful relationship with a
potential borrower before offering a PALs II loan to that borrower.
The Board agrees that establishing a meaningful relationship with a
potential borrower is a prudent lending practice and protects an FCU
from certain risks. Accordingly, the Board encourages FCUs to consider
establishing a minimum membership requirement as a matter of sound
business judgment. However, the Board believes that granting PALs II
loans to member borrowers, who need immediate access to funds, is a
better alternative than having those borrowers take out predatory
payday loans and wait for 30 days before rolling that predatory payday
loan over into a PALs II loan, or worse, never applying for a PALs II
loan. Therefore, the Board is adopting this aspect of the PALs II NPRM
as proposed. The Board notes, however, that this final rule does not
prohibit a credit union from setting a minimum membership term, but it
is not required to do so.
Section 701.21(c)(7)(iv)(A)(1)
The PALs I rule limits the principal amount of a PALs I loan to not
less than $200 or more than $1,000.\42\ In contrast, the PALs II NPRM
proposed to allow an FCU to offer a PALs II loan with a loan amount up
to $2,000 without any minimum loan amount. The Board believes that a
higher maximum and no minimum loan amount will allow an FCU to meet the
demands of more segments of the payday loan market. Furthermore, the
PALs II NPRM provided that a higher maximum loan amount will allow some
borrowers to cover a larger financial emergency or to consolidate
multiple payday loans into a PALs II loan, thereby providing a pathway
to mainstream financial products and services offered by credit unions.
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\42\ 12 CFR 701.21(c)(7)(iii)(A)(1).
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Maximum Loan Amount
Many commenters argued against the $2,000 maximum loan amount as
too low. These commenters argued that $2,000 is insufficient to cover
most large financial emergencies that prompt a borrower to resort to a
payday loan or to allow a borrower to consolidate all of the borrower's
payday loans. Some of these commenters, however, also argued that a
larger maximum loan amount would be more profitable and allow an FCU to
make sufficient interest to cover the cost of this type of lending.
In contrast, some commenters argued that allowing an FCU to charge
a 28 percent APR for a $2,000 PALs II loan is a slippery slope to
allowing an FCU to operate outside of the usury ceiling. These
commenters noted that larger, longer-term loans provide increased
revenue to the credit union and, therefore, the Board should not adopt
a special exception from the general usury ceiling for these types of
products.
While the Board recognizes that $2,000 may be insufficient to cover
a larger financial emergency or to allow a borrower to consolidate a
considerable number of payday loans, it nevertheless believes that
allowing an FCU to offer a $3,000 or $4,000 loan at 28 percent interest
is too high a limit and would violate the spirit of the FCU Act. In
adopting the PALs I rule, the Board reluctantly established a separate
usury ceiling for PALs I loans after a careful determination than an
FCU could not
[[Page 51948]]
provide a reasonable alternative to a payday loan under the general
usury ceiling. By allowing an FCU to charge a higher interest rate, the
Board sought to create a regulatory structure that allowed an FCU to
offer a responsible payday loan alternative to members in a prudent
manner.
The Board believes that $2,000 is a reasonable limit for the vast
majority of PALs II loan borrowers. Accordingly, the Board is also
adopting this aspect of the PALs II NPRM as proposed.
Minimum Loan Amount
Several commenters expressed support for removing the minimum loan
amount as a means of allowing an FCU to tailor its PALs II program to
the unique needs of its members. In contrast, other commenters argued
that removing the minimum loan amount would result in a triple digit
APR comparable to a traditional payday loan for any PALs II loan under
$100 where the credit union also charges an application fee.
The Board believes that an FCU should have the flexibility to meet
borrower demand to avoid the need for those borrowers to resort to a
traditional payday loan. While the total cost of credit may be high for
these loans, the PALs II rule provides significant structural
safeguards not present in most traditional payday loans.
Furthermore, the Board does not believe it is prudent for an FCU to
require a member to borrow more than necessary to meet the borrower's
demand for funds. Establishing a minimum PALs II loan amount would
require a borrower to carry a larger balance and incur additional
interest charges to avoid an apparently high APR when a smaller PALs II
loan would satisfy that borrower's need for funds without the
additional interest charges. On balance, the Board believes that the
borrower's real need to avoid additional charges outweighs the need to
avoid the appearance of a higher APR for smaller PALs II loans.
Accordingly, the Board is adopting this aspect of the PALs II NPRM as
proposed.
Nevertheless, the Board is mindful that allowing an FCU to charge
an application fee up to $20 in connection with a PALs II loan less
than $100 is problematic. Depending on the facts and circumstances, the
Board believes that charging a $20 application fee for a low amount
financed may take unfair advantage of the inability of the borrower to
protect his or her interests, especially where minimal underwriting is
expected to be performed. The Board reminds commenters that the
application fee is to recoup the actual costs associated with
processing an application. And more importantly, the $20 maximum amount
allowed under this rule is the ceiling, not the floor. Any application
fee charged by an FCU should be commensurate with the level of
underwriting necessary to process a PALs II loan. Accordingly, the NCUA
Board will instruct examiners to thoughtfully scrutinize the
application fee charged for a PALs II loan less than $200.
Section 701.21(c)(7)(iv)(A)(2)
The PALs I rule currently limits loan maturities to a minimum of
one month and a maximum of 6 months.\43\ The PALs II NPRM proposed to
allow an FCU to make a PALs II loan with a minimum maturity of one
month and a maximum maturity of 12 months. The PALs II NPRM provided
that the longer loan term will allow an FCU making a larger PALs II
loan to establish a repayment schedule that is affordable for the
borrower while still fully amortizing the loan.
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\43\ 12 CFR 701.21(c)(7)(iii)(A)(2).
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All of the commenters that addressed this issue favored a maximum
loan term of at least one year. A few commenters believed that a
maximum loan term of one year is too short, allowing borrowers
insufficient time to pay off larger PALs II loans. These commenters
favored a more flexible maximum loan term to allow an FCU to establish
a repayment schedule that is appropriate for the unique needs of each
individual borrower. Other commenters advocated for the removal of any
maximum maturity limit to allow an FCU the greatest amount of
flexibility to establish an affordable repayment schedule. A few
commenters also suggested that the Board increase the minimum loan term
to 90 days to make PALs II loans safer for borrowers.
Each group of commenters made a reasonable argument why the Board
should adopt a flexible maximum loan term. After considering these
varied viewpoints, the Board has determined to finalize this aspect of
the PALs II NPRM as proposed. Should the Board engage in any future
rulemaking regarding PALs loans, it will further consider the
commenters' suggestions along with any applicable data gathered on PALs
II loans.
Section 701.21(c)(7)(iv)(A)(3)
The PALs I rule currently prohibits an FCU from making more than
three PALs I loans in a rolling 6-month period to a single
borrower.\44\ The PALs II NPRM proposed to remove that restriction for
PALs II loans. However, an FCU would not be allowed not make more than
one of any type of PALs loan, whether a PALs I or PALs II loan, to a
single borrower at a time.
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\44\ 12 CFR 701.21(c)(7)(iii)(A)(3).
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Many of the commenters that addressed this issue favored removing
the limit on the number of PALs II loans that an FCU may make to a
borrower over 6 months as long as the Board retained the restriction of
making no more than one PALs loan to a single borrower at a time. These
commenters argued that this would provide FCUs with added flexibility
to meet the needs of their members, particularly those members that
currently use payday loans as a source of temporary liquidity. Other
commenters also favored removing the limit, but opposed retaining the
limit of one loan per borrower at a time.
Some commenters opposed removal of the limit on the number of PALs
II loans an FCU can make to a borrower in a 6-month period. These
commenters argued that such a change would allow an FCU to churn loans
each month, charging an application fee for each PALs loan, with little
economic benefit to the borrower similar to a predatory payday loan.
According to these commenters, this would create a strong incentive for
FCUs to adopt a business model that maximizes application fee revenue
at the expense of the borrower contrary to the purposes of PALs loans.
The Board has reconsidered this aspect of the proposed rule and
agrees that removing the limit on the number of PALs II loans an FCU
may make to a single borrower at a time may encourage some FCUs to
adopt a business model that maximizes fee revenue at the expense of the
borrower. The Board fashioned the structural safeguards in the PALs I
rule to eliminate the business practices common in the predatory payday
lending industry that trap borrowers in cycles of repeated borrowings.
Accordingly, the Board is not adopting this aspect of the PALs II NPRM
in the final rule.
Section 701.21(c)(7)(iv)(A)(8)
The final rule adds a new Sec. 701.21(c)(7)(iii)(A)(8) prohibiting
an FCU from charging an overdraft or NSF fee in connection with a PALs
II loan payment drawn against a borrower's account.\45\ In the PALs II
NPRM, the Board asked whether the NCUA should prohibit overdraft or NSF
fees charged
[[Page 51949]]
in connection with any PALs loan payments. Half of the commenters that
responded to this question answered in the affirmative, arguing that an
FCU could use overdraft fees in a predatory manner to extract
additional revenue from a PALs loan borrower. These commenters also
felt that allowing overdraft fees related to a PALs loan is contrary to
providing borrowers with a meaningful pathway towards mainstream
financial products and services because additional fees can have a
devastating impact on the borrower's financial health and leave the
borrower trapped in a ``cycle of debt.''
---------------------------------------------------------------------------
\45\ This includes extended overdraft fees or NSF fees that the
FCU would assess against the borrower for paying items presented for
payment after the PAL payment creates a negative balance in the
borrower's account.
---------------------------------------------------------------------------
The remainder of the commenters that responded to this question
opposed prohibiting an FCU from charging overdraft fees related to PALs
loans. These commenters argued that the decision to extend an overdraft
loan and charge overdraft fees should be business decisions for each
individual FCU and that the Board should not treat overdraft or NSF
fees charged in connection with a PALs loan payment any differently
from other circumstance when a borrower overdraws an account to make a
loan payment. Finally, some cautioned that prohibiting overdraft or NSF
fees could pose a safety and soundness risk to an FCU if a borrower
routinely overdraws an account because of a PALs loan.
The Board agrees that the decision to extend an overdraft loan to a
borrower is a business decision for each FCU to make in accordance with
its own risk tolerance. Generally, the Board also believes that an FCU
charging a reasonable and proportional overdraft fee in connection with
an overdraft loan is appropriate in most cases to compensate the credit
union for providing an important source of temporary liquidity to
borrowers. However, the Board has serious fairness \46\ concerns
regarding the potential harm to borrowers caused by allowing an FCU to
charge overdraft or NSF fees in connection with a PALs II loan payment
given the increased principal amount allowed for PALs II loans.
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\46\ A business practice is unfair if it is likely to cause
substantial consumer harm that is not reasonably avoidable by the
consumer and not otherwise outweighed by any countervailing benefits
to consumers or competition. See 15 U.S.C. 45(n).
---------------------------------------------------------------------------
Charging overdraft fees related to a PALs II loan payment is likely
to cause substantial borrower harm.\47\ The Board envisions PALs II
loan borrowers typically will be in a vulnerable financial position and
unable to take on additional expenses. Charging an overdraft fee in
this situation will likely weaken the borrower's financial position
further and can have cascading consequences including an inability to
repay the PALs II loan. Moreover, charging an overdraft fee in addition
to requiring repayment of the overdrawn balance makes the borrower even
less likely to meet other expenses or obligations.
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\47\ A harm may be ``substantial'' if ``a relatively small harm
is inflicted on a large number of consumers or if a greater harm is
inflicted on a relatively small number of consumers . . . [i]n most
cases, substantial injury would involve monetary or economic harm or
unwarranted health and safety risks.'' See Sen. Rep. No. 130, 103d
Cong. 2d Sess. 12 (1994), reprinted in 1994 U.S.C.C.A.N. 1787-1788.
---------------------------------------------------------------------------
This type of harm is also not reasonably avoidable by the
borrower.\48\ A borrower cannot reasonably avoid injury that results
from an unpredictable event.\49\ The decision whether to extend an
overdraft loan and charge an overdraft fee, rests entirely with the FCU
and not with the borrower. Accordingly, the borrower does not have an
ability to anticipate which items that could overdraw the account that
the FCU will honor and take appropriate action to minimize the
potential for overdraft fees. Even if the borrower, in the abstract,
should have the ability to anticipate such an event, behavioral
economics research shows that borrowers are prone to hyperbolic
discounting of the risk of potential negative events, making such an
ability to anticipate the overdraft more theoretical than actual.\50\
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\48\ ``A harm is `reasonably avoidable' if consumers `have
reason to anticipate the impending harm and the means to avoid it,'
or if consumers are aware of, and are reasonably capable of
pursuing, potential avenues toward mitigating the injury after the
fact.'' Davis v. HSBC Bank Nev., N.A., 691 F.3d 1152, 1168-69 (9th
Cir. 2012) (citing Orkin Exterminating Co. v. FTC, 849 F.2d 1354,
1365-66 (11th Cir. 1988)). Thus, ``[i]n determining whether
consumers' injuries were reasonably avoidable, courts look to
whether the consumers had a free and informed choice.'' FTC v.
Neovi, Inc., 604 F.3d 1150, 1158 (9th Cir. 2010).
\49\ Trade Regulation Rule; Credit Practices, 49 FR 7740, 7747
(Mar 1. 1984).
\50\ See e.g., Debra Pogrund Stark & Jessica M. Choplin, A
License to Deceive: Enforcing Contractual Myths Despite Consumer
Psychological Realities, 5 N.Y.U. J. L. & Bus. 617, 659-660 (2009).
---------------------------------------------------------------------------
Moreover, a borrower cannot reasonably avoid injury that results
from an involuntary event.\51\ The Federal Trade Commission (FTC) has
compiled an extensive factual record showing that ``the precipitating
cause of default is usually a circumstance or event beyond the debtor's
immediate control.'' \52\ Accordingly, ``among those defaults that do
occur, the majority are not reasonably avoidable by consumers. Instead,
default is a response to events that are largely beyond the consumer's
control.'' \53\ Although some precaution ``can reduce the risk of
default . . . no reasonable level of precautions can eliminate the
risk. Moreover, some consumers are unable to take various precautionary
steps.'' \54\ While an overdraft loan prevents a borrower from
defaulting, many of the same circumstances that would cause a borrower
to default would also cause a borrower to overdraw an account.
Furthermore, in the case of PALs II loan borrowers, the member borrower
may have limited ability to take precautionary steps to limit the harm
caused by overdrafts given the borrower's financial position.
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\51\ Trade Regulation Rule; Credit Practices, 49 FR 7740, 7747-8
(Mar 1. 1984).
\52\ Id.
\53\ Id.
\54\ Id.
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Allowing an FCU to charge overdraft fees related to a PALs II loan
payment offers an insubstantial benefit to borrowers or competition in
the payday lending marketplace when measured against the potential for
substantial borrower harm.\55\ The Board recognizes that allowing
overdraft or NSF fees will make an FCU more likely to extend an
overdraft loan to provide temporary liquidity for a PALs II loan
borrower. However, the tradeoff for that liquidity is the potential for
additional overdraft fees that could cause the borrower to experience
other negative consequences such as the loss of a vehicle or eviction
while trying to pay off overdraft fees. Moreover, while the Board
acknowledges that this provision could result in borrowers receiving
less overdraft loans or FCUs receiving less fee income, the Board
believes that overdraft loans related to PALs II loans leave the
borrower less financially stable and that FCUs already receive
sufficient income through application fees and higher APRs charged on
PALs II loan balances. Accordingly, the Board believes, on balance,
that potential borrower harm outweighs potential tangible benefits.
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\55\ In assessing whether a business practice is ``not
outweighed by countervailing benefits to consumers or to
competition,'' one is not required to ``quantify the detrimental and
beneficial effects of the practice in every case . . . [i]n many
instances, such a numerical benefit-cost analysis would be
unnecessary; in other cases, it may be impossible.'' Rather, one
must ``carefully evaluable the benefits and costs . . .considering
reasonably available evidence.'' See Sen. Rep. No. 130, 103d Cong.
2d Sess. 12 (1994), reprinted in 1994 U.S.C.C.A.N. 1787-1788. If the
net effect of a particular business practice is injurious to
consumers, then the practice is unfair. See Am. Fin. Svcs Ass'n v.
FTC, 767 F.2d 957 (D.C. Cir. 1985).
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Finally, the Board believes that allowing overdraft fees related to
a PALs
[[Page 51950]]
II loan payment is contrary to one of the goals of PALs loans,\56\
which is to provide borrowers with meaningful pathways towards
mainstream financial products and services offered by credit unions.
Accordingly, the Board is adopting a provision in the final rule to
prohibit an FCU from charging an overdraft or NSF fee in connection
with a PALs II loan payment drawn against a borrower's account. It may
consider imposing similar requirement on all PALs loans in a future
rulemaking should the Board determine that such a restriction is
necessary for all PALs loans.
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\56\ When determining whether a business practice is fair, one
may consider established public policy as evidence to be considered
with all over evidence. However, public policy may not serve as the
primary basis for determining the fairness of a business practice.
See 15 U.S.C. 45(n). At least some older cases have found excessive
bank fees to be unconscionable. See Perdue v. Crocker Nat'l Bank,
702 P.2d 503 (Cal. 1985).
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The Board recognizes that certain automated internal processes may
cause an FCU to violate this prohibition on charging an overdraft or
NSF fee in connection with a PALs II loan payment inadvertently. The
Board notes that any FCU that charges an overdraft or NSF fee in
connection with a PALs II loan payment should immediately refund the
charge to the borrower. If the FCU refunds the charge to the borrower,
the Board will not consider the FCU to have violated this aspect of the
PALs II rule.
VI. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires the NCUA to prepare an
analysis to describe any significant economic impact a regulation may
have on a substantial number of small entities (primarily those under
$100 million in assets).\57\ This rule will provide a limited number of
FCUs making PALs with additional flexibility to make such loans.
Accordingly, the Board believes that the rule will not have a
significant economic impact on a substantial number of small credit
unions. Therefore, a regulatory flexibility analysis is not required.
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\57\ 5 U.S.C. 603(a).
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Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(Pub. L. 104-121) (SBREFA) provides generally for congressional review
of agency rules. The NCUA triggers a SBREFA reporting requirement when
the agency issues a final rule as defined by section 551 of the
Administrative Procedure Act. As required by SBREFA, the NCUA submitted
this final rule to the Office of Management and Budget (OMB) for it to
determine if the final rule is a ``major rule'' for purposes of SBREFA.
The OMB determined that the rule is not major. The NCUA also will file
appropriate reports with Congress and the Government Accountability
Office so this rule may be reviewed.
Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (44 U.S.C. 3501, et seq.) (PRA), the NCUA may not conduct or
sponsor, and the respondent is not required to respond to, an
information collection unless it displays a currently valid OMB control
number. For purposes of the PRA, an information collection may take the
form of a reporting, recordkeeping, or a third-party disclosure
requirement, referred to as a paperwork burden. The information
collection requirements of Sec. 701.21 of NCUA's regulations are
assigned OMB control number 3133-0092 and this rule would not impose
any new paperwork burden.
Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this final rule will not affect family
well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999.\58\
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\58\ Public Law 105-277, section 654, 112 Stat. 2681, 2681-581
(1998).
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Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests.\59\
The NCUA, an independent regulatory agency, as defined in 44 U.S.C.
3502(5), voluntarily complies with the executive order to adhere to
fundamental federalism principles. The final rule will not have
substantial direct effects on the states, on the relationship between
the national government and the states, or on the distribution of power
and responsibilities among the various levels of government. The NCUA
has therefore determined that this final rule does not constitute a
policy that has federalism implications for purposes of the executive
order.
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\59\ 64 FR 43255 (Aug. 4, 1999).
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List of Subjects in 12 CFR Part 701
Credit unions, Federal credit unions.
By the National Credit Union Administration Board on September
19, 2019.
Gerard S. Poliquin,
Secretary of the Board.
For the reasons stated above, the National Credit Union
Administration amends 12 CFR part 701 as follows:
PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS
0
1. The authority for part 701 continues to read as follows:
Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759,
1761a, 1761b, 1766, 1767, 1782, 1784, 1786, 1787, 1789. Section
701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 is also
authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610.
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.
0
2. Amend Sec. 701.21 by revising paragraph (c)(7)(iii) and adding
paragraph (c)(7)(iv) to read as follows:
Sec. 701.21 Loans to members and lines of credit to members.
* * * * *
(c) * * *
(7) * * *
(iii) Payday alternative loans (PALs I)--(A) Minimum requirements
for PALs I. Notwithstanding any other provision of this section, a
federal credit union may charge an interest rate that is 1000 basis
points above the maximum interest rate established by the Board under
paragraph (c)(7)(ii) of this section provided the federal credit union
is offering closed-end credit, as defined in Sec. 1026.2(a)(10) of
this title, in accordance with the following conditions:
(1) The principal of the payday alternative loan is not less than
$200 or more than $1,000;
(2) The payday alternative loan has a minimum maturity of one month
and a maximum maturity of six months;
(3) The federal credit union does not make more than three payday
alternative loans provided under either this paragraph (c)(7)(iii) or
paragraph (c)(7)(iv) of this section in any rolling six-month period to
any one borrower and does not make more than one payday alternative
loan provided under either this paragraph (c)(7)(iii) or paragraph
(c)(7)(iv) of this section at a time to any borrower;
(4) The federal credit union does not rollover any payday
alternative loan provided under this paragraph (c)(7)(iii) or paragraph
(c)(7)(iv) of this section, provided that the prohibition against
rollovers does not apply to an extension of a payday alternative loan
term within
[[Page 51951]]
the maximum loan term set forth in paragraph (c)(7)(iii)(A)(3) of this
section that does not include any additional fees assessed or extend
additional credit to the borrower;
(5) The federal credit union fully amortizes the payday alternative
loan;
(6) The federal credit union requires the borrower to be a member
of the credit union for at least one month before receiving a payday
alternative loan provided under this paragraph (c)(7)(iii);
(7) The federal credit union charges a reasonable application fee
to all members applying for a new payday alternative loan offered under
this paragraph (c)(7)(iii) that reflects the actual costs associated
with processing the application, but that in no case exceeds $20; and
(8) The federal credit union includes, in its written lending
policies, a limit on the aggregate dollar amount of payday alternative
loans made under this paragraph (c)(7)(iii) and paragraph (c)(7)(iv) of
this section that does not exceed an aggregate of 20% of net worth and
implements appropriate underwriting guidelines to minimize risk, such
as, requiring a borrower to verify employment by providing at least two
recent pay stubs.
(B) PALs I guidance and best practices. In developing a successful
payday alternative loan program, a federal credit union should consider
how the program would benefit a member's financial well-being while
considering the higher degree of risk associated with this type of
lending. The guidance and best practices are intended to help federal
credit unions minimize risk and develop a successful program, but are
not an exhaustive checklist and do not guarantee a successful program
with a low degree of risk.
(1) Program features. Several features that may increase the
success of a payday alternative loan program and enhance member benefit
include adding a savings component, financial education, reporting of
members' payment of payday alternative loans to credit bureaus, or
electronic loan transactions as part of a payday alternative loan
program. In addition, although a federal credit union cannot require
members to authorize a payroll deduction, a federal credit union should
encourage or incentivize members to utilize payroll deduction.
(2) Underwriting. Federal credit unions should develop minimum
underwriting standards that account for a member's need for quickly
available funds, while adhering to principles of responsible lending.
Underwriting standards should address required documentation for proof
of employment or income, including at least two recent paycheck stubs.
Federal credit unions should be able to use a borrower's proof of
recurring income as the key criterion in developing standards for
maturity lengths and loan amounts so a borrower can manage repayment of
the loan. For members with established accounts, federal credit unions
should only need to review a member's account records and proof of
recurring income or employment.
(3) Risk avoidance. Federal credit unions should consider risk
avoidance strategies, including requiring members to participate in
direct deposit and conducting a thorough evaluation of the federal
credit union's resources and ability to engage in a payday alternative
loan program.
(iv) Payday alternative loans (PALs II)--(A) Minimum requirements
for PALs II. Notwithstanding any other provision of this section, a
federal credit union may charge an interest rate that is 1000 basis
points above the maximum interest rate established by the Board under
paragraph (c)(7)(ii) of this section provided the federal credit union
is offering closed-end credit, as defined in Sec. 1026.2(a)(10) of
this title, in accordance with the following conditions:
(1) The principal of the payday alternative loan is not more than
$2,000;
(2) The payday alternative loan has a minimum maturity of one month
and a maximum maturity of 12 months;
(3) The federal credit union does not make more than three payday
alternative loans provided either under paragraph (c)(7)(iii) of this
section or this paragraph (c)(7)(iv) in any rolling six-month period to
any one borrower and does not make more than one payday alternative
loan provided under either paragraph (c)(7)(iii) of this section or
this paragraph (c)(7)(iv) at a time to any borrower;
(4) The federal credit union does not rollover any payday
alternative loan provided under paragraph (c)(7)(iii) of this section
or this paragraph (c)(7)(iv), provided that the prohibition against
rollovers does not apply to an extension of a payday alternative loan
term within the maximum loan term set forth in paragraph
(c)(7)(iv)(A)(3) of this section that does not include any additional
fees assessed or extend additional credit to the borrower;
(5) The federal credit union fully amortizes the payday alternative
loan;
(6) The federal credit union charges a reasonable application fee
to all members applying for a new payday alternative loan offered under
this paragraph (c)(7)(iv) that reflects the actual costs associated
with processing the application, but that in no case exceeds $20;
(7) The federal credit union does not assess a fee or charge,
including a non-sufficient funds fee, on the borrower's account
pursuant to the federal credit union's overdraft service, as defined in
Sec. 1005.17(a) of this title, in connection with any payday
alternative loan provided under this paragraph (c)(7)(iv); and
(8) The federal credit union includes, in its written lending
policies, a limit on the aggregate dollar amount of payday alternative
loans made under paragraph (c)(7)(iii) of this section and this
paragraph (c)(7)(iv) that does not exceed an aggregate of 20% of net
worth and implements appropriate underwriting guidelines to minimize
risk, such as, requiring a borrower to verify employment by providing
at least two recent pay stubs.
(B) PALs II guidance and best practices. In developing a successful
payday alternative loan program, a federal credit union should consider
how the program would benefit a member's financial well-being while
considering the higher degree of risk associated with this type of
lending. The guidance and best practices are intended to help federal
credit unions minimize risk and develop a successful program, but are
not an exhaustive checklist and do not guarantee a successful program
with a low degree of risk.
(1) Program features. Several features that may increase the
success of a payday alternative loan program and enhance member benefit
include adding a savings component, financial education, reporting of
members' payment of payday alternative loans to credit bureaus, or
electronic loan transactions as part of a payday alternative loan
program. In addition, although a federal credit union cannot require
members to authorize a payroll deduction, a federal credit union should
encourage or incentivize members to utilize payroll deduction.
(2) Underwriting. Federal credit unions should develop minimum
underwriting standards that account for a member's need for quickly
available funds, while adhering to principles of responsible lending.
Underwriting standards should address required documentation for proof
of employment or income, including at least two recent paycheck stubs.
Federal credit unions should be able to use a borrower's proof of
recurring income as the key criterion in developing standards for
maturity lengths and loan amounts so a borrower
[[Page 51952]]
can manage repayment of the loan. For members with established
accounts, federal credit unions should only need to review a member's
account records and proof of recurring income or employment.
(3) Risk avoidance. Federal credit unions should consider risk
avoidance strategies, including requiring members to participate in
direct deposit and conducting a thorough evaluation of the federal
credit union's resources and ability to engage in a payday alternative
loan program.
* * * * *
[FR Doc. 2019-20821 Filed 9-30-19; 8:45 am]
BILLING CODE 7535-01-P
