Early look at payday rule shows important reforms, concerns

June 6, 2016

CUNA’s initial analysis of the Consumer Financial Protection Bureau’s (CFPB) small-dollar proposed rule found some important reforms to predatory lending, but consumer-friendly credit union products appear to be swept in as well. CFPB Director Richard Corday praised the credit union lending model during the bureau’s field hearing Thursday, and has told CUNA to inform the bureau about credit union products that are affected by the rule.

The CFPB’s proposal adds restrictions on payday, title, and high-cost installment loans that meet certain requirements.

CUNA will work closely with the CFPB to highlight parts of the proposal that could add to credit unions’ regulatory burden. Several CUNA-requested changes were made from the versions of the proposal released in March 2015 via the Small Business Regulatory Enforcement Fairness Act.

The NCUA’s Payday Alternative Loan (PAL) program is mentioned a number of times in the rule. It is a short-term, small-dollar product with interest limited to 28% and application fees capped at $20.

Early analysis of the rule’s treatment of PALs shows:

  • PALs are nominally exempted, but CUNA’s early analysis indicates credit unions offering PALs or other similar loans may face additional burdens;
  • The proposal appears to allow for a member to receive 6 PALs per year, after the CFPB initially suggested 4 per year. CUNA asked the bureau to raise the number to 6 to match the amount allowed by the NCUA; and
  • The proposal includes new requirements for the verification of income, and adds several other modifications to the PAL program including a change from a minimal loan of 30 days to 45 days, limitations on payment transfers, amortization requirements and debt collection requirements.

A few other early concerns that have jumped out at CUNA include:

  • The proposed use of an all-in measure of the cost of credit, rather than the definition of annual percentage rate under Regulation Z for proposing a broader definition of “lender” than Regulation Z does in defining “creditor;”
  • The proposal would define “closed-end” credit as extension of credit to a consumer that is not open-end credit under proposed § 1041.2(14) of the rule. This definition is used in various parts of the rule, most notably where it would prescribe slightly different methods of calculating the total cost of credit of closed-end and open-end credit;
  • New disclosures and ACH requirements for non-exempt loans; and
  • New reporting requirements for covered loans not meeting an exception to the ability-to-repay requirements.

For a deeper look into CUNA’s early analysis of the rule, see CUNA’s Removing Barriers blog.