NCUA Expands Short-term Loan Rules (Monitor: September 20, 2010)
The NCUA is expanding the rules for federal credit unions to make short-term, small-amount loans and to extend lines of credit to members, effectively giving consumers an alternative to potentially predatory payday lenders.
While FCUs have been allowed to make short-term loans, limits on interest rates have made competition with for-profit companies difficult.
“This initiative gives consumers a real and practical alternative to predatory lenders,” NCUA Chairman Debbie Matz said . “It also gives credit unions the tools to enhance their outreach to consumers – particularly those in low-income communities who need greater access to mainstream financial services. At the same time, this new rule offers a business model that makes sense for credit unions.”
FCUs will be allowed to charge higher interest rates for short-term, small-amount loans than the ceiling permitted under Federal Credit Union Act. The rule imposes limits on the permissible term, amount, and fees associated with such a loan.
“I strongly encourage credit unions to make full use of this new flexibility for the benefit of their members,” Matz said. “Moreover, I strongly encourage consumers to look for the kind of fairly priced financial options offered by credit unions.”
The new rule requires FCUs to set a cap on the total dollar amount of such loans that they make, and it requires them to set at least a one-month period in which a would-be borrower must be a member of the credit union.
Permitting a higher interest rate for such loans will allow FCUs to make loans cost-effectively, even as the limitations set by the new rule will ensure that such loans meet their purpose as an alternative to predatory credit products. The new rule also includes guidance in the form of “best practices” that FCUs should consider incorporating into their short-term, small amount programs.
Here are the basic guidelines for the program:
- An interest rate up to 28%. The current maximum established by the NCUA Board is 18%;
- A principal between $200 and $1000;
- A term of the loan between one month and six months; and
- An application fee that reflects the costs associated with making the loan, not to exceed $20.
There are also limits on the number of such loans to one member within a six-month period, and loan rollovers.
The regulation will be effective 30 days after publication in the Federal Register. The new regulation can be found online at http://www.ncua.gov/GenInfo/BoardandAction/DraftBoardActions/2010/Sep/Item3b09-16-10.pdf.