[Federal Register Volume 77, Number 188 (Thursday, September 27, 2012)]
[Proposed Rules]
[Pages 59346-59348]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-23718]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 701
RIN 3133-AE08
Payday-Alternative Loans
AGENCY: National Credit Union Administration (NCUA).
ACTION: Advance notice of proposed rulemaking (ANPR).
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SUMMARY: The NCUA Board (Board) is currently reviewing its regulation
governing payday-alternative loans (PAL or PAL loans), formerly known
as short-term, small amount loans. The Board intends to improve the
regulation to encourage more federal credit unions (FCUs) to offer PAL
loans and believes it may be necessary to amend the regulation. The
Board seeks comment on how best to approach this. Although the Board
identifies specific issues for discussion below, it encourages
commenters to discuss any issue related to improving the regulation.
DATES: Comments must be received on or before November 26, 2012.
ADDRESSES: You may submit comments by any of the following methods
(Please send comments by one method only):
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA Web Site: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the
instructions for submitting comments.
Email: Address to [email protected]. Include ``[Your
name] Comments on Advance Notice of Proposed Rulemaking for Part 701,
PAL Amendments'' in the email subject line.
Fax: (703) 518-6319. Use the subject line described above
for email.
Mail: Address to Mary Rupp, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.
Public Inspection: You may view all public comments on NCUA's Web
site at http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx as
submitted,
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except for those we cannot post for technical reasons. NCUA will not
edit or remove any identifying or contact information from the public
comments submitted. You may inspect paper copies of comments in NCUA's
law library at 1775 Duke Street, Alexandria, Virginia 22314, by
appointment weekdays between 9 a.m. and 3 p.m. To make an appointment,
call (703) 518-6546 or send an email to [email protected].
FOR FURTHER INFORMATION CONTACT: Frank Kressman, Associate General
Counsel, Office of General Counsel, at the above address or telephone
(703) 518-6540.
SUPPLEMENTARY INFORMATION:
I. Background
A. The PAL Rule
B. Evaluation of PAL Data and Justification for the Rulemaking
II. Questions for Comment
I. Background
A. The PAL Rule
On September 16, 2010, the Board amended its general lending rule
to enable FCUs to offer PAL loans, previously referred to as short-
term, small amount loans, as an alternative to predatory payday
loans.\1\ PAL loans can help certain members to break free of their
dependency on high-cost payday loans. To help FCUs afford to make PAL
loans, which tend to have higher rates of default than mainstream loan
products, the PAL rule permits FCUs to charge a higher rate of interest
for PAL loans if certain conditions are met.
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\1\ 75 FR 58285 (Sept. 24, 2010).
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The term ``payday loan'' generally refers to a small amount, short-
term loan that is intended to cover a borrower's expenses until his or
her next payday, which is when the loan is to be repaid in full.\2\
Historically, payday loans have been made by lenders who charge high
fees and often engage in predatory lending practices. While some payday
loan borrowers use these loans sparingly, many find themselves in a
cycle of having their loans ``rollover'' repeatedly, and they incur
more high fees as a result. These borrowers are often unable to break
free of this unhealthy dependence on payday loans.
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\2\ NCUA Instruction 10200, Credit Union Online Instruction
Guide, page 32 (12/2009).
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As part of the solution, the Board is determined to provide a
regulatory framework for FCUs to make PAL loans a viable alternative to
predatory payday loans. The Board intends the PAL loan rule to provide
short- and long-term benefits for current payday borrowers. In the
short term, the rule provides borrowers with a responsible alternative
to high-cost payday loans. In the long term, the rule permits FCUs to
offer borrowers a way to break the cycle of reliance on payday loans by
building creditworthiness and transitioning to traditional, mainstream
financial products.
The current PAL regulation permits FCUs to charge an interest rate
for PAL loans that is 1000 basis points above the general interest rate
set by the Board for non-PAL loans, provided the following conditions
are met:
(1) The principal amount of the PAL loan is not less than $200 and
not more than $1000;
(2) The PAL loan has a minimum maturity term of one month and a
maximum maturity term of six months;
(3) The FCU does not make more than three PAL loans in any rolling
six-month period to any one borrower and makes no more than one PAL
loan at a time to a borrower;
(4) The FCU does not rollover any PAL loan;
(5) The FCU fully amortizes the loan;
(6) The FCU sets a minimum length of membership requirement of at
least one month;
(7) The FCU charges an application fee to all members applying for
a new PAL loan that reflects the actual costs associated with
processing the application, but in no case may the application fee
exceed $20; and
(8) The FCU includes, in its written lending policies, a limit on
the aggregate dollar amount of PAL loans made to a maximum of 20% of
net worth and implements appropriate underwriting guidelines to
minimize risk; for example, requiring a borrower to verify employment
by producing at least two recent pay stubs.\3\
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\3\ 12 CFR 701.21(c)(7)(iii).
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The rule also includes a best practices section, which discusses
ways to help ensure the product remains viable and responsible.
B. Evaluation of PAL Data and Justification for the Rulemaking
In the 2010 rulemaking, the Board indicated that, after one year,
it would review the PAL loan data collected on the 5300 call reports
and reevaluate the requirements of the rule.\4\ As of September 30,
2011, 372 FCUs reported offering PAL loans with an aggregate balance of
$13.6 million on 36,768 outstanding loans.
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\4\ Id. at 58288.
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The most recent data shows that as of June 30, 2012, 420 FCUs
reported offering PAL loans with an aggregate balance of approximately
$16.7 million on 41,264 outstanding loans.
The Board notes that, during this nine-month period, there was a
slight increase in the number of participating FCUs, and it commends
those FCUs that offer PAL loans to their members. The Board intends to
increase the participation level in a meaningful way and ensure that
all FCUs that choose to offer PAL loans are able to recover their
costs.
The Board acknowledges that some FCUs may choose not to offer PAL
loans because their members do not need them. Further, the Board
recognizes that some FCUs offer other non-PAL loan products and
services to their members that also reduce dependence on traditional
payday lenders. Nevertheless, there are many credit union members who
would benefit greatly from enhanced access to PAL loans. Accordingly,
the Board is committed to making PAL loans a more widespread product
for those members who need them and making it is easier and more
affordable for those FCUs that choose to offer them. NCUA advises that
an FCU can only make PAL loans available to its members if the FCU can
afford to make these loans.
II. Questions for Comment
The Board is considering ways to improve the PAL regulation. An
increase in the permissible application fee may enable FCUs with higher
application processing costs to afford to offer PAL loans to their
members. The Board understands that actual costs to process an
application may be higher for some FCUs based on geographic location or
the level of underwriting a particular FCU chooses to conduct. While
the Board does not expect FCUs to generate a large return from these
loans, it does not expect FCUs to offer PAL loans at a loss, which
could threaten the FCUs' safety and soundness.
The Board could consider increasing the permissible application fee
without making any other changes or it could increase the fee in
conjunction with a decrease in the permissible loan interest rate. The
Board understands that some credit unions prefer not to charge a higher
interest rate on PAL loans, but must do so to offset the higher degree
of risk associated with these loans. The Board invites comment on if a
higher application fee cap alone would encourage more credit unions to
make PAL loans or if credit unions would prefer any application fee
increase to be linked with a lower permissible interest rate.
Although the Board is considering increasing the maximum
application fee, the Board notes that under
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Regulation Z (Reg Z), an application fee may only serve to recoup the
actual costs incurred by an FCU to process a PAL loan application. FCUs
would still need to accurately account for their costs in determining a
permissible application fee, and they would not be able to use this fee
to offset losses associated with this type of lending. NCUA will
continue to scrutinize these fees to ensure compliance with Reg Z and
ensure PAL loans remain a beneficial product for FCU members.
In addition to seeking comment on the application fee and interest
rate, the Board seeks comment on all aspects of the regulation. The
questions enumerated below are intended to stimulate commenter response
and suggest areas where NCUA may improve the rule to encourage more
FCUs to offer PAL loans. Commenters should feel free to comment on any
aspect of the PAL regulation. Of course, commenters should include
reasonable justification for all comments provided.
Additional Questions for Consideration
(1) Should the Board increase the permissible PAL loan interest
rate, which is currently set at 28% (based on 1000 basis points above
the maximum interest rate established by the Board for non-PAL loans)?
(2) Should the Board expand the permissible loan range, which is
currently set from $200 to $1000?
(3) Should the Board permit PAL loan maturities of shorter than one
month or longer than six months?
(4) Should the Board allow FCUs to make more than one PAL loan at a
time to a borrower?
(5) Should the Board eliminate or decrease the one-month minimum
length of membership requirement?
(6) Should the Board increase the limit on the permissible
aggregate dollar amount of loans made, which currently is 20% of an
FCU's net worth?
In addition to soliciting comments on the current PAL rule, the
Board is also interested in learning about viable payday-alternative
products credit unions are currently offering their members. The Board
invites commenters to describe products and programs they offer and to
share details about the business models they use to execute successful
programs.
By the National Credit Union Administration Board on September
21, 2012.
Mary Rupp,
Secretary of the Board.
[FR Doc. 2012-23718 Filed 9-26-12; 8:45 am]
BILLING CODE 7535-01-P