NCUA Proposes Changing Lending Rule to Allow Federal Credit Unions to Offer Payday Alternative Loans

In a proposed rule issued last week by the National Credit Union Administration (NCUA) Board, federal credit union members could have more options for short-term, small-dollar borrowing. This comes on the heels of a bulletin issued last week by the Office of the Comptroller of the Currency, which laid out strategies for banks to offer short-term, small-dollar lending products.

Since 2010, NCUA has allowed federal credit unions to offer small-dollar loans called payday alternative loans (PALs). These loans, called “PALs I”, range from $200 to $1000, require the borrower to have been a member of the federal credit union for at least one month, limit the term of the loan to six months, charge an application fee only in the amount needed to recoup the actual costs associated with processing the borrower’s application with a maximum of $20, and cannot be rolled over.

The proposed rule does not replace this current PAL product, but expands it to allow credit unions to offer a second PAL product. The proposed new product (PALs II) incorporates many of the features of PALs I,  but provides additional flexibility for credit unions in the areas of loan amount, membership requirement, loan term, and number of loans permitted.

Specifically, the proposed PALs II products could be offered in amounts up to $2,000, with no minimum loan amount. The NCUA proposal notes that this higher amount may allow some borrowers to consolidate high-priced, traditional payday loans into one less expensive PALs II loan. Corresponding to the increase in permissible loan amount, the PALs II product would have a maximum loan term of 12 months, while retaining the one-month minimum term from the PALs I. Additionally, consumers seeking PALs II loans would not need to have been a member of the credit union beforehand, eliminating the membership requirement. Finally, the PALs II proposal also eliminates the limits on the number of loans a borrower can take out in a rolling six-month period.

The draft proposal must now enter a comment period of 60 days from the date it is published in the Federal Register.