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.