WASHINGTON (3/27/15)--The Consumer Financial Protection Bureau (CFPB) released a plan early Thursday morning aimed at eliminating payday lending "debt traps," and CUNA is evaluating it to determine if it accomplishes its goal without hindering credit unions' efforts to provide credit to their members.
The new consumer protections would apply to payday loans, vehicle title loans, deposit advance products and certain high-cost installment and open-end loans.
"One of the goals of the founders of the American credit union movement was to create a system of cooperative finance that provided consumers with access to credit, including short-term, small-dollar loans, on fair terms and rates. Therefore, CUNA supports the ability of credit unions to provide beneficial short-term, small loans as alternatives to predatory payday lending, which has no place in the financial marketplace," said CUNA President/CEO Jim Nussle.
"The extent to which credit unions will be able to continue to productively, efficiently and responsibly serve their members' short-term, small-dollar credit needs will be a key measure we use in evaluating these proposals. If the rule results in consumers having reduced access to credit from credit unions or if the access to credit is made more expensive by regulatory burdens imposed on credit unions which would be more appropriately targeted toward the abusers of consumers, it will have failed to adequately protect consumers.
"We are evaluating the proposals the bureau released overnight, and we look forward to discussing them with our members, the CFPB and other policymakers," Nussle added.
The proposal would cover both short-term credit products (which must be paid in full within 45 days), and long-term loans where the lender collects payments through access to the borrower's bank accounts. One of the proposal's main focuses is requiring a lender to determine a borrower's ability to repay a loan before granting it.
For long-term loans, the CFPB is considering protections already used by the National Credit Union Administration for its payday alternative loan program. Those loans are capped at 28% interest and an application fee of no more than $20.
The other approach the bureau is examining for long-term loans would cap a loan payment amount at no more than 5% of the borrower's gross monthly income, and no more than two such loans can be made to a borrower within a 12-month period.
For short-term loans, lenders would have to verify a borrower's income, financial obligations and borrowing history to determine the consumer's ability to repay. There would be a 60-day "cooling off period" between loans--loans cannot be made within that period unless there is documentation the borrower's circumstances have improved enough to repay without re-borrowing.
Lenders also would not be allowed to keep consumers in debt on short-term loans for more than 90 days in a 12-month period. Rollover loans would be capped at two, followed by a mandatory 60-day cooling off period.
For the second and third consecutive short-term loans, the bureau is considering two options. One would require the principal decrease with each loan, so that it is repaid after the third loan, or require the lender provide a no-cost "off-ramp" after the third loan, to allow the consumer to pay the loan off over time without further fees.