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NCUA proposes additional loan program for burgeoning payday lending industry

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NCUA proposes additional loan program for burgeoning payday lending industry

The National Credit Union Administration wants to give credit unions another loan option to offer their members in the rapidly growing payday lending line.

At the end of 2017, 518 federal credit unions reported 190,000 outstanding payday alternative loans, or PALs, with an aggregate balance of $13.3 million, the NCUA said. PALs are short-term, small-dollar loans provided as an alternative to often pricey payday loans, which are offered by nonbanks.

The Consumer Financial Protection Bureau estimates the payday loan industry is generating $23.6 billion in new loans per year, so there is opportunity for credit unions to grab a larger market share.

At its May 24 meeting, the NCUA board approved a notice of proposed rulemaking that could result in a second version of its payday alternative loan program. The proposal would not replace the current rule, which was adopted in 2010, but instead give credit unions another option for offering short-term credit.

There would be four primary differences in the new proposal from the current PALs program, said Martha Ninichuk,? director of credit union resources and expansion at the NCUA. For one, borrowers would not be required to hold credit union membership for 30 days before obtaining a short-term loan. Also, the loan amounts would go as high as $2,000, and the $200 minimum would be removed.

Loan terms would run from one to 12 months, and credit unions could only make one loan at a time to each member, but there would be no restrictions on how many PALs a borrower could obtain over a set period of time. The first loan, however, would have to be fully repaid before another could be granted.

NCUA Chairman J. Mark McWatters said the new program would have to be CFPB compliant, as the initial NCUA PALs program already is. He said there are a couple items within the new proposal that credit unions could adopt immediately that would allow them to fall within a CFPB exemption.

Justin Anderson, NCUA senior staff attorney, said there could be some additional compliance required for credit unions interested in offering the new program. "But overall I think the compliance burden is relatively low," he said. To comply with the terms of the exemption, credit unions would only need to have certain policies and record-keeping in place.

The proposed rule also requests comments on the possibility of creating a third PALs loan program that would include different fee structures, loan features, maturities and loan amounts. McWatters said the regulator needs input from credit unions to draft programs that are fair to consumers but also allow credit unions to make a decent rate of return. "If you're losing money you're not going to make the loans," he said.

McWatters proposed the NCUA board submit a letter to the CFPB asking for safe harbor treatment for the two new PALs programs much like the original payday loan program has.

Board member Rick Metsger said he supports the loan programs because they provide consumers a low-cost alternative to "unscrupulous, predatory lenders." But he is a little concerned that having three different types of payday options available may be confusing to some credit unions.

The Consumer Financial Protection Bureau in October finalized a rule that would impose new protections on payday loans.

The Office of the Comptroller of the Currency earlier this week voiced its support for banks offering short-term, small-dollar loans with maturities greater than 45 days. McWatters commended the OCC for the action. "It seems like there should be payday alternative programs for federally insured financial institutions," he said.