NCUA issues rule allowing CUs to make short-term, small-amount loans.
NCUA Rules On STS Loans
In September 2010, the National Credit Union Administration (NCUA) issued a final rule that allows federal credit unions to offer short-term, small-amount loans (STS loans) to members as an alternative to predatory payday loans. The final rule went into effect last month.
To apply for an STS loan, an individual must be a credit union member for at least one month. These credit unions can charge a $20 application fee to all members applying for a loan, and they can use the fee to recoup processing fees. STS loans can demand interest rates higher than what’s permissible under standard lending regulations because of the higher risks involved. Federal credit unions can charge 1,000 basis points above the current interest rate ceiling of 18%, resulting in a permissible rate of 28%.
STS loans must be fully amortized. Federal credit unions must structure repayments in a way that allows the borrower to pay a portion of the principal and interest in equal or near equal installments during the course of the loan. Finally, STS loans must be underwritten (although the final rule doesn’t specify underwriting standards) and federal credit unions must set a cap for these loans at 20% of total net worth.
The rule provides for a minimum maturity of one month and a maximum maturity of six months. NCUA encourages federal credit unions to structure the loan terms in a way that’s most likely to ensure repayment. A federal credit union can make only one loan at a time to a member and can make no more than three loans per member within a rolling six-month period. Although rollovers are prohibited, federal credit unions have some flexibility to extend loan terms. They can extend the term of a loan if they charge no additional fees, except interest, for the extended term and provide no additional loan funds. Extensions can’t exceed the maximum loan term (six months) set by the rule. And federal credit unions are allowed to provide for additional interest charges under the extension.
Under the rule, the minimum loan amount is $200 and the maximum amount is $1,000. The rule does give credit unions flexibility to offer short-term loans of less than $200 if they’re in line with NCUA and Truth in Lending (Regulation Z) regulations. NCUA doesn’t provide the same degree of flexibility with the maximum loan limit of $1,000, however. The agency notes the $1,000 maximum gives members sufficient access to cash while still being a “manageable short-term loan.”
Finally, NCUA plans to use the 5300 call report to collect data about STS loans and use it to re-evaluate STS loan programs and requirements for upcoming years.
You can access the final rule and the Credit Union National Association's (CUNA) analysis of it on CUNA's website.
No Worries About CRA Compliance
Credit unions continue to be inundated with new regulatory burdens. In the “very good news” category, key congressional representatives recently announced credit unions shouldn’t have to worry about having to comply with Community Reinvestment Act (CRA) requirements.
Congress passed CRA in 1977 to address discriminatory lending practices by banks in low-income areas—a practice known as redlining. Under CRA, a bank’s performance in helping to meet the credit needs of its community is evaluated by examiners in the context of information about the bank (such as its size), its community (including demographic and economic data), and its competitors and peers. An overall CRA rating is assigned to each bank, using a four-tiered rating system: outstanding, satisfactory, needs to improve, and substantial noncompliance.
Regulatory bodies can use poor CRA ratings to deny applications for new branches, mergers, or acquisitions. In a few states, state-chartered credit unions are subject to state laws that require reporting similar to the federal law.
House of Representatives Financial Services Committee Chairman Barney Frank, D-Mass., has made it clear that he wants to expand CRA compliance beyond banks. He has been persuaded, however, that credit unions shouldn’t be included. In fact, he told Massachusetts credit unions this fall, “This is a fight that you will not have to worry about in the future.” And right before Congress left Washington for the November elections, Congressman Luis Gutierrez, D-Ill., chairman of the House Subcommittee on Financial Institutions and Consumer Credit, introduced H.R. 6334 to expand CRA beyond banks, strengthen the examination process, and make the CRA ratings and evaluation process more open to public review and comment. Credit unions weren’t included in the Gutierrez bill.
Demonstrate Investment Due Diligence
NCUA’s Letter to Credit Unions No. 10-CU-18 on “Investment Due Diligence” reminds credit unions the agency expects credit union investment decisions will be part of a well-thought-out risk management plan.
NCUA cautions that while investments can provide supplemental income when loan demand is low, “management must consistently demonstrate a comprehensive understanding of the investments purchased and ensure that these instruments fit within both the policies and business strategies of your credit union.”
In the letter, NCUA notes that investment risk management should include reasonable exposure limits, an understanding of the investment’s characteristics and any underlying collateral, and a thorough determination of the suitability of the investment. “Knowing what questions to ask and which documents to review is the foundation of a solid due diligence process,” the agency writes.
Before purchasing an investment, NCUA expects a credit union to evaluate and document the fundamental elements of the investment, including:
- The type of investment;
- Whether it features a federal government guarantee;
- How many collateral affects the price and cash flow of the instrument;
- The interest rate structure;
- The dollar amount of the particular investment measured by the overall investment portfolio or credit union’s asset size; and
- The maturity.
And, of course, NCUA expects credit unions to evaluate how the proposed investment complies with their investment policy and asset-liability management constraints.
Find all NCUA’s Letters to Credit Unions at ncua.gov.
Compliance Q & A
Q. Is federal share insurance a government contract for affirmative action purposes?
A. Going back as far as 1980, the U.S. Department of Labor has tried several times to assert that a credit union insured by the National Credit Union Share Insurance Fund (NCUSIF) is a “federal government contractor” subject to the rules of the Labor Department’s Office of Federal Contract Compliance Programs (OFCCP). The OFCCP requires certain government contractors to maintain formal affirmative action plans and take other compliance steps.
In response to the Labor Department’s position, NCUA and the Federal Deposit Insurance Corp. have said federal share or deposit insurance isn’t a government contract triggering the Labor Department’s jurisdiction.
This issue resurfaced last summer because a new department regulation requires federal government contractors to post a notice about employee rights under federal labor laws. Buried in its regulation, the Labor Department reiterates its position that federal insurance is a federal contract.
NCUA has assured CUNA that, regardless of this latest assertion, credit unions don’t have to comply with this poster requirement simply because they’re NCUSIF-insured.
As a reminder, credit unions that participate in other federal government programs—such as holding Treasury tax-and-loan accounts or acting as a paying or issuing agent for U.S. savings bonds—are federal contractors, and, therefore, must comply with certain nondiscrimination and affirmative action rules.
Q. Does the credit union have to provide a change-in-terms notice when canceling a member’s ATM/debit card?
A. No. A 21-day advance notice isn’t required under Regulation E (Electronic Fund Transfers) when an institution closes some of its ATMs or cancels an access device, such as an ATM/debit card (Official Staff Commentary to Section 205.8(a)(2) of Regulation E).
Nevertheless, from a member relations standpoint, the credit union should provide some type of warning to the member that his card has been/will be cancelled. And the credit union should always review the terms of its account agreement before taking action. Credit unions are required to provide a Reg E change-in-terms notice to the consumer at least 21 days before the effective date of any change in a term that would be adverse to the consumer, such as increased fees, increased liability, fewer types of available EFTs, or stricter limitations on the frequency or dollar amount of transfers.