Section (c)(7)(iv)-Payday Alternative Loans (PALs II)
The final rule creates a new provision, § (c)(7)(iv), that sets forth the requirements for PALs II loans. In the PALs II NPRM, a majority of commenters asked that the Board combine the PALs I rule and proposed PALs II rule together in a single PALs regulation. Most of the commenters argued strongly that one PALs loan regulation would reduce confusion and provide FCUs with greater flexibility to structure their PAL programs in ways that best serve their members.
A small number of commenters raised serious concerns regarding the applicability of the CFPB’s payday lending rule should the Board adopt any changes to the PALs I rule. The CFPB’s payday lending rule establishes consumer protections for certain high-cost credit products, including payday loans, and deems some credit practices related to those products to be unfair or abusive in violation of the Consumer Financial Practices Act. However, the CFPB’s payday lending rule provides a “safe harbor” for any loan that is made by an FCU in compliance with the PALs I rule with an explicit cross-reference to § (c)(7)(iii). These commenters argued that any changes to the PALs I rule may eliminate the safe harbor for FCUs in the CFPB’s rule. To allow FCUs to continue to avail themselves of the safe harbor, the commenters requested that the Board adopt the PALs II rule as a separate provision within the NCUA’s general lending rule.
Because the regulatory landscape with respect to payday lending remains somewhat uncertain until the Bureau completes the rulemaking process, the Board believes that adopting the PALs II rule as a separate provision within the NCUA’s general lending rule is appropriate at this time to preserve the availability of the safe harbor for FCUs that offer PALs loans that conform to the requirements of the PALs I rule.
Current § (c)(7)(iii)(A)(6) requires a borrower to be a member of an FCU for at least one month before the FCU can make a PALs I loan to that borrower. However, an FCU may establish a longer period as a matter of business judgment. The PALs II NPRM proposed to remove this minimum membership time requirement for PALs II loans. The purpose of this change was to allow an FCU to make a PAL II loan to any member borrower that needs access to funds immediately and would otherwise turn to a payday lender to meet that need.
Many of the commenters that addressed this issue favored removing the minimum membership time requirement with respect to PALs II loans. These commenters argued that this change would provide an FCU with the flexibility necessary to serve member borrowers that need immediate access to temporary liquidity who might otherwise turn to a payday lender. In contrast, a few commenters argued against this change, noting that that a minimum membership requirement is a prudent lending practice that helps an FCU establish a meaningful relationship with a potential borrower before offering a PALs II loan to that borrower.
The Board agrees that establishing a meaningful relationship with a potential borrower is a prudent lending practice and protects an FCU from certain risks. Accordingly, the Board encourages FCUs to consider establishing a minimum membership requirement as a matter of sound business judgment. However, the Board believes that granting PALs II loans to member borrowers, who need immediate access to funds, is a better alternative than having those borrowers take out predatory payday loans and wait for 30 days before rolling that predatory payday loan over into online payday loans Texas a PALs II loan, or worse, never applying for a PALs II loan. Therefore, the Board is adopting this aspect of the PALs II NPRM as proposed. The Board notes, however, that this final rule does not prohibit a credit union from setting a minimum membership term, but it is not required to do so.