Updated PALs rule provides more options
The final rule will become effective Dec. 2, 2019.
The Consumer Financial Protection Bureau (CFPB) issued the final Payday Lending Rule in November 2017 to establish regulations for payday loans, vehicle title loans, and certain high-cost installment loans.
The final rule:
• Identified the underwriting of payday loans without an ability-to-repay determination as an unfair and abusive practice (referred to as the mandatory underwriting provisions).
• Established certain requirements and limitations with respect to attempts by the lender to withdraw payments from member accounts in ways that could rack up excessive fees or deviate from what the borrower expects (referred to as the payment provisions).
These provisions originally had a compliance date of Aug. 19, 2019. However, in February 2019, CFPB issued two notices of proposed rulemaking (NPRMs) seeking comment on whether to rescind the mandatory underwriting provisions of the 2017 final rule and whether to delay the compliance date to Nov. 19, 2020.
At the time, the agency stated it was preliminarily finding that rescinding this requirement would increase consumer access to credit.
CFPB decided to revisit the mandatory underwriting provisions after reviewing the comments received on the February 2019 NPRM. Note that the agency did not propose reconsideration of the payment provisions of the 2017 final rule.
The agency issued a final rule on June 6, 2019, which delayed the compliance date for the mandatory underwriting provisions by 15 months to Nov. 19, 2020.
Texas court ruling
As of the publication of this article, the compliance date for both the mandatory underwriting provisions and the payment provisions is stayed pursuant to a court order (issued in Community Financial Services Association of America Ltd., et al. v. Consumer Financial Protection Bureau et al., No. 1:18-cv-00295 [W.D. Tex. Nov. 6, 2018]).
As a result, credit unions have no obligation to comply with the payday lending rule until the court-ordered stay is lifted.
This stay applies to all provisions of the payday lending rule and to all credit unions, even those outside the jurisdiction of the Texas court. The parties are expected to provide their next status update to the court on Dec. 6, 2019.
At that time, if the stay is lifted, the payment provisions of the payday lending rule would be in effect. As discussed above, the compliance date for the mandatory underwriting provisions is delayed to Nov. 19, 2020.
Next: NCUA’s PALs program
NCUA’s PALs program
CFPB’s Payday Lending Rule excludes or exempts several types of consumer credit, including alternative loans made under NCUA’s Payday Alternative Loan (PALs) program.
The Federal Credit Union Act generally limits federal credit unions to a 15% interest rate ceiling on loans. In 2010, however, NCUA established an exception to the interest rate limit and permitted federal credit unions to offer payday alternative loans under its PALs program.
Federal credit unions may charge those borrowers up to 28% on PALs under the terms and conditions specified in NCUA’s regulation:
- A principal amount of $200 to $1,000 to borrowers who have been members of the credit union for at least one month.
- An application fee of no more than $20.
- A term of one to six months.
- Up to three PALs to each member during a six-month period.
- PALs can't overlap or roll over.
In addition, PALs must fully amortize, and the credit union must establish underwriting guidelines such as verifying borrowers’ employment from at least two recent pay stubs.
On Sept. 19, 2019, the NCUA approved a final rule which allows federal credit unions to offer an additional payday alternative loan option to members.
The final rule, known as PALs II, does not replace the current PALs program (PALs I) but is a distinct product with features to help federal credit unions meet specific needs of certain payday loan borrowers that are not met by the current program and provide those borrowers with a safer, less expensive alternative to traditional payday loans.
Specifically, the PALs II program:
- Allows a federal credit union to offer a PALs II loan for any amount up to $2,000.
- Increases the maximum maturity for PALs II loans to 12 months.
- Eliminates the minimum membership requirements to permit a federal credit union to make a PALs II loan immediately upon the borrower’s establishing membership.
- Restricts a federal credit union to offering only one type of PALs loan to a member at any given time.
All other requirements of the existing PALs I, including a prohibition against rollovers, a limitation on the number of loans a single borrower can take in a given period, full amortization, an application fee not to exceed $20, and underwriting guidelines, are incorporated into PALs II.
The final rule also noted that the May 2018 PALs II NPRM had solicited comments from interested stakeholders on the possibility of creating a third PALs loan program (PALs III), which could include different fee structures, loan features, maturities, and loan amounts.
The final rule will become effective Dec. 2, 2019.
PATRICIA O’CONNELL is CUNA’s senior federal compliance counsel.