ALEXANDRIA, Va. (12/19/14)--The Department of Defense (DOD) should exempt National Credit Union Administration Payday Alternative Loans (PALs) from its Military Lending Act proposal, NCUA Chair Debbie Matz said in a letter filed with the DOD Thursday.
In her comment letter, Matz said exempting PALs would continue to allow federally insured credit unions (FCUs) to provide affordable credit alternatives to the military and its families.
"PALs serve as a viable alternative to predatory payday loans and can help members avoid or end dependency on those loans," Matz wrote. "In fact, the department's report on enhancing protections on consumer credit for servicemembers and their dependents cites PALs as an example of 'small dollar loans designed to assist servicemembers who appear to need a way out of unmanageable debt.'"
Matz added that while the agency supports consumer protections and the goal of the proposed rule, the NCUA believes its regulation permitting payday alternative loans "appropriately balances" the needs of consumer protection and affordable credit.
The NCUA's current regulation, issued in 2010, allows federal credit unions to offer PALs with a rate cap of 1,000 basis points above the 18% general rate cap for credit unions and an application fee of up to $20.
"The PALs regulation reflects NCUA's careful deliberation about how to develop a product that would enable FCUs to offer their members a reasonable alternative to high-cost payday loans," Matz wrote. "PALs have beneficial features that protect borrowers, and the evidence to date shows that PALs are considerably cheaper than payday loans."
Under the DOD's proposed rule, consumer credit to covered borrowers is subject to a 36% cap on the military annual percentage rate (APR), which includes application fees. According to the NCUA, if these regulations are revised to cover payday alternative loans, the rate and fee for many payday alternative loans would be higher than the military APR cap.
The Defense Department's proposed rule would cover other types of consumer credit as well, including credit card accounts and overdraft lines of credit with a finance charge.