Federal Regulators Intensify Focus on High-Cost Loans

Proposals could impact CU alternatives to payday lending.

June 1, 2015

In September 2014, the Department of Defense (DOD) proposed to expand the coverage of the Military Lending Act, and in March the Consumer Financial Protection Bureau (CFPB) released initial proposals to regulate payday lending for the first time at the federal level.

These proposals might affect credit unions—especially through their potential impact on NCUA’s Payday Alternative Loan (PAL) program.

NCUA’s PAL program

In 2010, NCUA established a special exception to the 18% federal usury ceiling to enable federal credit unions to offer short-term, small-amount loans that provide members a viable alternative to predatory payday loans.

About 500 federal credit unions currently offer PALs, with an average loan balance of $382 and a total of about $37 million in loans outstanding. This amount might seem small, but represents a 36% year-over-year increase.

Under current PAL rules, the maximum:

  • Permissible interest rate is 28% (1,000 basis points higher than the 18% ceiling);
  • Loan amount is $1,000, with a one- to six-month maturity; and
  • Application fee is $20, a figure NCUA believed sufficient for a federal credit union to recoup its processing costs.

The regulation includes guidance to help federal credit unions “minimize risk and develop a successful program,” including desirable features such as having a savings component and incentivizing members to use payroll deduction. The regulation also addresses underwriting best practices, such as documenting proof of employment or income.

In 2012, NCUA issued an advance notice of proposed rulemaking, asking for input on what regulatory changes might encourage more payday-alternative lending by federal credit unions.

CUNA suggested changes such as allowing members to have more than one PAL at a time—with more flexibility in loan size and maturity— and allowing federal credit unions to charge higher application fees and interest rates.

NCUA hasn’t taken any further action to amend the PAL regulation— probably because it’s waiting to see what, if any, action the CFPB takes on payday lending.

Military Lending Act

The Military Lending Act (MLA) of 2006 provides active duty service members and their spouses and dependents a unique federal interest rate ceiling of 36%, along with several special consumer protections.

The DOD’s 2007 rule implementing the MLA focused on three products: vehicle title loans, tax refund anticipation loans, and payday loans, defined by DOD as “closed-end credit with a term of 91 days or fewer in which the amount financed does not exceed $2,000.”

The MLA establishes a maximum “military” annual percentage rate (MAPR) of 36%. This rate includes more charges than incorporated by Regulation Z into APR, including renewal charges, credit insurance premiums, and fees for credit-related ancillary products sold as part of the credit transaction. DOD’s regulation also requires the consumer to provide the creditor an identification statement advising that he or she is a “covered borrower” under MLA, and prohibits the creditor from mandating arbitration to resolve disputes.

In December 2014, DOD issued a proposal to widely expand the scope of its MLA rule to include deposit advances, installment loans, unsecured open-end lines of credit, and credit cards. The proposed rule would shift the burden for determining “covered borrower” status from the consumer to the creditor, requiring creditors to check a DOD database. It also proposes including application fees and “participation” fees, including annual fees, into the calculation of MAPR.

NCUA Chairman Debbie Matz last fall expressed concern that DOD’s proposal “would prevent federal credit unions from making payday alternative loans permitted by our rule.”

In response to the DOD proposal, CUNA submitted a joint letter with the African-American Credit Union Coalition, the Defense Credit Union Council, the National Association of Federal Credit Unions, and the National Association of State Credit Union Supervisors expressing concern that including additional fees (especially application fees) into the calculation of MAPR could make certain loan programs unfeasible.

The letter also noted that shifting the determination of MLA coverage to creditors could expose them to liability, and slow down loan originations. The groups emphasized that credit unions don’t engage in predatory lending and should be exempt from the DOD proposal.

CFPB actions

The CFPB also has intensified its focus on payday lending. The bureau has published two studies on payday loans, and last year ordered one of the nation’s largest payday lenders to provide $5 million in refunds and pay a $5 million penalty for using “false threats, intimidation, and harassing calls to bully payday borrowers into a cycle of debt.”

In March, the CFPB released a document outlining its ideas to regulate payday lenders. Director Richard Cordray said too many loans “are based on a lender’s ability to collect and not on a borrower’s ability to repay.” The bureau received input from a small-business review panel (which included several credit union representatives) and will begin formulating a proposed regulation, which is expected before the end of the year.

The bureau expects to address short-term loan products (including payday loans, deposit advances, and some vehicle title loans payable within 45 days). It also will address longer-term products where the lender collects payments through access to the consumer’s deposit account or paycheck, or holds a nonpurchase money security interest in the consumer’s vehicle, and where the loan has an “all-in” annual percentage rate (APR) of more than 36%. That APR definition includes “interest, fees, and the cost of ancillary products such as credit insurance, memberships, and other products sold along with the credit.”

The CFPB is considering either “debt trap prevention requirements”— where the creditor must determine the consumer’s ability to repay before making the loan—or “debt trap protection requirements”— where the creditor must have affordable repayment options, and limits the number of loans a borrower can take out in a row and over the course of a year.

The bureau specifically cites the merits of provisions in NCUA’s current PAL program, but it also includes a short section in its March document recognizing its approach could impose new restrictions on federal credit unions beyond NCUA’s rules, and could increase costs by mandating actions such as credit report checks.

The demand for short-term credit is undeniable, and credit union lending programs can provide a safe and consumer-friendly way of meeting this demand.

CUNA is very concerned about the DOD proposal and the CFPB preproposal concepts. We’re pushing DOD to exempt credit unions from its proposed expanded MLA coverage. And while we applaud the CFPB for addressing the problem of payday lenders, credit unions aren’t payday lenders, aren’t part of any problem, and shouldn’t be covered by any CFPB regulation.

Instead, federal agencies should focus their energy on improving NCUA’s PAL regulation to assist credit unions in making payday-alternative loans.

Justin Santopietro is a regulatory affairs specialist at CUNA. Contact CUNA’s compliance team at

CUs aren’t payday lenders, and shouldn’t be covered by any CFPB regulation.