WASHINGTON–Hold on just a moment—credit unions may not be as safe from the CFPB’s broad, proposed new rulemaking over short-term, small-dollar loans as had been initially hoped when the proposal was released.
Both credit union trade groups are expressing concerns CUs will be caught up in inadvertent and unintended consequences of the 1,500-page proposal the CFPB unveiled yesterday, with credit union members who are in a financial pinch becoming the real victims. Even though credit unions and NCUA’s Payday Alternative Loan (PAL) program are singled out for praise by the CFPB, one CUNA analyst said experience has shown that when regulatory agencies attempt to create carve-outs without specifically providing a carve-out, it usually leads to problems.
While stating that it is grateful for the CFPB’s recognition Thursday of NCUA’s PALs program, NAFCU said it remains extremely concerned about the proposal’s effect on credit unions’ ability to exercise statutory liens as defined by the Federal Credit Union Act.
“(The proposal) is a good first step, but we believe the Bureau can do more,” said NAFCU President and CEO Dan Berger. “NAFCU is reviewing the full proposed rule to assess its comprehensive impact on all aspects of credit union lending. We look forward to providing additional comments and continuing to work with the Bureau on this critical issue.”
Similarly, CUNA’s Chief Advocacy Officer, Ryan Donovan, said the “overall complexity” of the proposal has the trade association concerned.
Dan Berger, NAFCU
“Here you have a 1,500-page rule on small-dollar, short-term lending and the type of activities credit unions have been doing for years,” said Donovan. “It’s overly complicated. In general, credit unions that try to comply with this, particularly smaller ones, are going to find it difficult. We’ve been trying to analyze it since it came out and we’re still trying to figure out exactly what the CFPB is trying to do and how they are going to go about accomplishing it. It’s relatively complex for lending that is relatively simple.”
Not Optimistic
When asked by CUToday.info whether the CFPB might come back and following the comment period include a specific carve-out for credit unions, Donovan said he’s not optimistic.
“We believe it’s clearly within their authority to do that, but we don’t think they are inclined to do that,” he said. “What we hope is that when all is said and done we will get a role that facilitates credit union lending in this market and does not impede it. The early indications are that it is not hitting the mark.”
NAFCU noted it continues to press the CFPB to use its Dodd-Frank Act exemption authority more effectively to provide credit unions regulatory relief.
Meanwhile, NAFCU noted that the Bureau proposes to prescribe a “full-payment test” to loans covered by the payday lending proposal. During the CFPB’s field hearing in Kansas City at which the proposal was formally unveiled, that “test” was described by a representative of the payday loan industry as the equivalent of the paperwork required for a 30-year mortgage.
In NAFCU’s view, “Generally, the proposed rule would require that a lender determine the consumer will be able to repay a loan up front without having to reborrow. This would not apply, however, to loans that generally meet the parameters of the PAL loan authorized by NCUA. This option would be available to all lenders on the same basis and not just to federal credit unions.”
Not Much PAL Margin
Elizabeth Eurgubian, CUNA
While PAL-compliant loans at credit unions have come in for praise from the CFPB, the issue remains that many are marginally profitable to the CUs that make them, and many also lose money. APRs on PALs are capped at 28% and application fees do not exceed $20. There may be no more than three PAL loans to the member over a rolling six-month period.
Andy Price, senior director of advocacy and counsel at CUNA, acknowledged there has never been much margin in PALs made by credit unions, saying CUs that do offer the loans do so as a service to members in need.
CUNA stressed that its interpretation of the new CFPB proposal is still early in the process, and that much of the language in the 1,500-page document is still to be reviewed. CUNA’s Donovan said the trade group will take its time as it reviews the document and will not be making any broad pronouncements about what the rules might mean anytime soon.
But CUNA’s Deputy Chief Advocacy Officer and Senior Counsel, Elizabeth Eurgubian, said history offers some lessons that may be instructive. Eurgubian noted that if there’s no specific carve-out, then it essentially means credit unions are covered by the new rules, regardless of the agency’s intent.
“When you have a regulator like the CFPB that doesn’t give a flat-out exemption for the good actors who have been doing things properly, then they try to get at it in another way,” said Eurgubian. “They are trying to write a rule that in essence will exempt the PAL program without actually doing it. That is very difficult, and sometimes the agency will inadvertently bring in some programs they didn’t attempt to. This is always the difficulty when a regulator tries to write its way around giving an exemption.”''
CUToday.info's complete coverage of the CFPB payday proposal is below: