Debbie Matz, NCUA
DUBLIN, Ireland.–NCUA Chairman Debbie Matz Tuesday talked to military CUs about her concern for how two regulatory proposals to change payday lending rules could prevent credit unions from making affordable payday alternative loans.
She also cautioned about the need for CUs to address interest rate risk as rates begin to rise.
Speaking to the Defense Credit Union Council’s Overseas Subcouncil in Dublin, Ireland, Matz addressed the potential negative impacts of the Defense Department proposing a “military APR” limit of 36% on payday loans and other short-term lending products, and the CFPB’s advance notice of proposed rulemaking that would apply “Ability-to-Repay” underwriting requirements for certain loans in addition to mortgages.
“Proposals from two federal agencies could require credit unions to make major changes in their loan programs,” Matz told the Council. “NCUA supports the intent of proposals from the Defense Department and the Consumer Financial Protection Bureau to protect consumers from predatory lending, but we are working to ensure those rules avoid unintended consequences of outlawing access to affordable credit union loans.”
Matz also warned credit unions about rising interest rates. “Just as soldiers plan ahead for coming battles, credit unions must prepare for a changing interest rate environment.”
Military APR Adds Fees
Addressing the DoD’s “military APR” limit on payday loans, Matz pointed out that unlike the annual percentage rate charged to civilians, the military APR would include fees, which are normally exempt under Truth in Lending Act rules.
“We have done the math and found that when fees are included, many credit unions’ short-term loans would exceed the proposed 36% military APR limit,” Matz said. “Unfortunately, this proposed rule would deny access to affordable alternatives to predatory payday loans.”
In 2010, NCUA established a regulatory framework for payday alternative loans, the agency explained, allowing FCUs to charge an APR up to 28% and an application fee of no more than $20 to cover the processing cost. Today, more than 500 federal credit unions offer payday alternative loans, including several military-related credit unions, NCUA reported.
The average payday alternative loan balance is $630 with a median interest rate of 24.6%, continued the agency. And the average total cost for a 30-day payday alternative loan is $33.
However, the Defense Department’s proposed rule would ban such loans for military members and their families, Matz said. “We are asking the Defense Department to modify its proposal to prevent the unintended consequence of outlawing affordable credit union loans to the very servicemembers NCUA’s rule was intended to protect.”
In December, Matz wrote to the Defense Department asking the department to exempt NCUA’s payday alternative loans from the final military APR rule.
Turing to the CFPB’s advance notice of proposed rulemaking that would apply “Ability-to-Repay” underwriting requirements for certain loans in addition to mortgages, the chairman explained that the bureau is considering an exception for loans that satisfy NCUA’s payday alternative loan regulation, if the lender verifies the consumer’s income and the new loan does not result in the consumer having more than two covered longer-term loans from any lender during a six-month period.
Matz said NCUA continues to work with CFPB and the Defense Department to resolve the agency’s concerns and avoid unintended consequences. “We are making every effort with these agencies to promote your credit unions’ ability to provide needed services to military members,” Matz said. “I encourage all of you to do the same.”
IRR On NCUA Radar
Matz highlighted other issues on NCUA’s radar, including guarding against cybersecurity threats, addressing capital outliers, providing regulatory relief and preparing for coming changes in interest rates.
“Interest rate risk isn’t just a concern for NCUA; it’s a concern for all financial institutions’ regulators,” Matz said. “Interest rate risk is now higher than it was before the crisis. While most credit unions managed through interest rate hikes in the past, not every credit union is as well positioned today.”
Net long-term assets have risen from 25% of assets 10 years ago to 35% of assets today. Credit unions also have less flexibility to adjust to rising rates, the agency noted.
The Federal Reserve’s Federal Open Market Committee forecast anticipates that by 2017, the Fed Funds rate will rise by 300 basis points. Matz said NCUA examiners are therefore urging credit unions to shock their balance sheets with interest rate hike assumptions up to 300 basis points and to plan well ahead for that contingency.