NCUA Expands Options for Small-Dollar Loans

The National Credit Union Administration (NCUA) recently issued a new rule that provides credit unions more options to offer small-dollar loans to members.

Currently, credit unions are able to offer small-dollar loans under the payday alternative loan (PAL) rule. This rule requires small-dollar loans to be between $200 and $1,000 and have a loan duration between one and six months. PAL also set a maximum interest rate of 28 percent.

NCUA’s new rule, called the PALs II rule, does not replace the original rule but expands the options available to credit unions. For instance, PALs II allows credit unions to offer loans of up to $2,000 with a loan duration of one year. The interest rate cap of 28 percent remains unchanged. 

The NCUA voted 2-1 in favor of the new rule. “The PALs II rule is a free-market solution that responds to the need for small-dollar lending in the marketplace,” said NCUA Chairman Rodney E. Hood. “This can make a difference by helping borrowers build or repair credit records, allowing them to graduate to other mainstream financial products. We want to encourage responsible lending that allows consumers to address immediate needs while working towards fuller financial inclusion.”

Over the past six years, credit unions have substantially increased their small-dollar lending portfolio, rising from $115 million in 2014 to $143 million in 2018. Experts expect it to rise again to $160 million in 2019 and even further in 2020 once the PAL II goes into effect, which is in 60 days once published in the Federal Register.