Editor's Note: This story has been updated after the two organizations featured in this story issued a new statement that removed some of the statements included in its initial release. Specifically, two executives affiliated with Self-Help Credit Union were quoted in the original statement; in the updated statement those quotes were deleted. As a result of those changes, the original headline to this story has been updated to more accurately reflect what is reported. In addition, the National Consumer Law Center also issued a new statement on behalf of its president, which is included, below.
WASHINGTON–Two consumer groups are criticizing the NCUA board for approving a new Payday Alternative Loans (PALs) program for being a step toward “predatory lending” and for representing a risk to what credit unions stand for.
As CUToday.info reported here, by a 2-1 vote the board approved a new program called PALs II that is in addition to what is now known as PALs I. PAL II loans are now permitted up to be made by credit unions in amounts up to $2,000, with no minimum loan amount and a maximum term of 12 months. That’s a change from the PALs I loans that are restricted to amounts between $200 and $1,000 and a six-month term.
In response, while acknowledging improvements over the proposed PALs II rule, the Center for Responsible Lending (CRL) and the National Consumer Law Center issued a joint statement saying the new program could expose credit union members to loans with effective annual percentage rates above 100% and to larger loans at rates that could be unaffordable.
‘NCUA…Weakened Consumer Protections’
Earlier, the two organizations had jointly submitted a comment letter on the proposed rule. This and a separate letter from more than a hundred organizations, including community, consumer, civil rights, faith, and legal services groups, urged the NCUA to maintain guardrails against predatory lending, the groups noted.
“The mission of Payday Alternative Loans is to help financially distressed credit union members, so strong safeguards are needed to prevent PAL from pulling these economically vulnerable members deep into debt. The NCUA board today missed an opportunity to buttress its consumer protections and instead weakened them,” said Mike Calhoun, president of the Center for Responsible Lending. “Specifically, the NCUA missed the opportunity to explicitly require that credit unions verify that members can repay these loans, considering both income and expenses. Add to this today’s vote to expand the maximum loan size from $1,000 to $2,000 for PAL loans – which are already allowed at rates higher than typical credit union loans – and some people may be pushed into a dangerous cycle of re-borrowing substantial amounts of money. In other words, the result of this program change could be piling mountains of debt onto some already indebted, low-income credit union members. NCUA Member Todd Harper commendably opposed this harmful final rule while speaking to the need for reasonable costs and for larger loans taking into consideration borrowers’ ability to repay.
“While the NCUA overall weakened consumer protections, the board should be applauded for listening to a broad coalition of community groups in improving the initial proposal by maintaining existing limits on the number of PAL loans issued within a short time period," Calhoun added.
Calhoun's earlier reference was to a statement made by Harper that the program runs the risk of pushing members into payday lender-like triple-digit APRs on loans.
“Credit unions serve their members with a range of loan products, the vast majority of which are outside the Payday Alternative Loan program and under the statutory interest rate cap of 18% APR,” said Lauren Saunders, associate director of the National Consumer Law Center. “That makes today’s harmful changes especially disappointing, including the elimination of the minimum loan size of $200 and allowing higher rates on larger loans. But we are gratified that the NCUA did retain the limit on three loans in a six-month period, abandoning the original proposal to allow credit unions to engage in loan-flipping of very short-term loans the way payday lenders do.