[Federal Register Volume 77, Number 188 (Thursday, September 27, 2012)]
[Proposed Rules]
[Pages 59346-59348]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-23718]



12 CFR Part 701

RIN 3133-AE08

Payday-Alternative Loans

AGENCY: National Credit Union Administration (NCUA).

ACTION: Advance notice of proposed rulemaking (ANPR).


SUMMARY: The NCUA Board (Board) is currently reviewing its regulation 
governing payday-alternative loans (PAL or PAL loans), formerly known 
as short-term, small amount loans. The Board intends to improve the 
regulation to encourage more federal credit unions (FCUs) to offer PAL 
loans and believes it may be necessary to amend the regulation. The 
Board seeks comment on how best to approach this. Although the Board 
identifies specific issues for discussion below, it encourages 
commenters to discuss any issue related to improving the regulation.

DATES: Comments must be received on or before November 26, 2012.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web Site: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the 
instructions for submitting comments.
     Email: Address to regcomments@ncua.gov. Include ``[Your 
name] Comments on Advance Notice of Proposed Rulemaking for Part 701, 
PAL Amendments'' in the email subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for email.
     Mail: Address to Mary Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.
    Public Inspection: You may view all public comments on NCUA's Web 
site at http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx as 

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except for those we cannot post for technical reasons. NCUA will not 
edit or remove any identifying or contact information from the public 
comments submitted. You may inspect paper copies of comments in NCUA's 
law library at 1775 Duke Street, Alexandria, Virginia 22314, by 
appointment weekdays between 9 a.m. and 3 p.m. To make an appointment, 
call (703) 518-6546 or send an email to OGCMail@ncua.gov.

FOR FURTHER INFORMATION CONTACT: Frank Kressman, Associate General 
Counsel, Office of General Counsel, at the above address or telephone 
(703) 518-6540.


I. Background
    A. The PAL Rule
    B. Evaluation of PAL Data and Justification for the Rulemaking
II. Questions for Comment

I. Background

A. The PAL Rule

    On September 16, 2010, the Board amended its general lending rule 
to enable FCUs to offer PAL loans, previously referred to as short-
term, small amount loans, as an alternative to predatory payday 
loans.\1\ PAL loans can help certain members to break free of their 
dependency on high-cost payday loans. To help FCUs afford to make PAL 
loans, which tend to have higher rates of default than mainstream loan 
products, the PAL rule permits FCUs to charge a higher rate of interest 
for PAL loans if certain conditions are met.

    \1\ 75 FR 58285 (Sept. 24, 2010).

    The term ``payday loan'' generally refers to a small amount, short-
term loan that is intended to cover a borrower's expenses until his or 
her next payday, which is when the loan is to be repaid in full.\2\ 
Historically, payday loans have been made by lenders who charge high 
fees and often engage in predatory lending practices. While some payday 
loan borrowers use these loans sparingly, many find themselves in a 
cycle of having their loans ``rollover'' repeatedly, and they incur 
more high fees as a result. These borrowers are often unable to break 
free of this unhealthy dependence on payday loans.

    \2\ NCUA Instruction 10200, Credit Union Online Instruction 
Guide, page 32 (12/2009).

    As part of the solution, the Board is determined to provide a 
regulatory framework for FCUs to make PAL loans a viable alternative to 
predatory payday loans. The Board intends the PAL loan rule to provide 
short- and long-term benefits for current payday borrowers. In the 
short term, the rule provides borrowers with a responsible alternative 
to high-cost payday loans. In the long term, the rule permits FCUs to 
offer borrowers a way to break the cycle of reliance on payday loans by 
building creditworthiness and transitioning to traditional, mainstream 
financial products.
    The current PAL regulation permits FCUs to charge an interest rate 
for PAL loans that is 1000 basis points above the general interest rate 
set by the Board for non-PAL loans, provided the following conditions 
are met:
    (1) The principal amount of the PAL loan is not less than $200 and 
not more than $1000;
    (2) The PAL loan has a minimum maturity term of one month and a 
maximum maturity term of six months;
    (3) The FCU does not make more than three PAL loans in any rolling 
six-month period to any one borrower and makes no more than one PAL 
loan at a time to a borrower;
    (4) The FCU does not rollover any PAL loan;
    (5) The FCU fully amortizes the loan;
    (6) The FCU sets a minimum length of membership requirement of at 
least one month;
    (7) The FCU charges an application fee to all members applying for 
a new PAL loan that reflects the actual costs associated with 
processing the application, but in no case may the application fee 
exceed $20; and
    (8) The FCU includes, in its written lending policies, a limit on 
the aggregate dollar amount of PAL loans made to a maximum of 20% of 
net worth and implements appropriate underwriting guidelines to 
minimize risk; for example, requiring a borrower to verify employment 
by producing at least two recent pay stubs.\3\

    \3\ 12 CFR 701.21(c)(7)(iii).

    The rule also includes a best practices section, which discusses 
ways to help ensure the product remains viable and responsible.

B. Evaluation of PAL Data and Justification for the Rulemaking

    In the 2010 rulemaking, the Board indicated that, after one year, 
it would review the PAL loan data collected on the 5300 call reports 
and reevaluate the requirements of the rule.\4\ As of September 30, 
2011, 372 FCUs reported offering PAL loans with an aggregate balance of 
$13.6 million on 36,768 outstanding loans.

    \4\ Id. at 58288.

    The most recent data shows that as of June 30, 2012, 420 FCUs 
reported offering PAL loans with an aggregate balance of approximately 
$16.7 million on 41,264 outstanding loans.
    The Board notes that, during this nine-month period, there was a 
slight increase in the number of participating FCUs, and it commends 
those FCUs that offer PAL loans to their members. The Board intends to 
increase the participation level in a meaningful way and ensure that 
all FCUs that choose to offer PAL loans are able to recover their 
    The Board acknowledges that some FCUs may choose not to offer PAL 
loans because their members do not need them. Further, the Board 
recognizes that some FCUs offer other non-PAL loan products and 
services to their members that also reduce dependence on traditional 
payday lenders. Nevertheless, there are many credit union members who 
would benefit greatly from enhanced access to PAL loans. Accordingly, 
the Board is committed to making PAL loans a more widespread product 
for those members who need them and making it is easier and more 
affordable for those FCUs that choose to offer them. NCUA advises that 
an FCU can only make PAL loans available to its members if the FCU can 
afford to make these loans.

II. Questions for Comment

    The Board is considering ways to improve the PAL regulation. An 
increase in the permissible application fee may enable FCUs with higher 
application processing costs to afford to offer PAL loans to their 
members. The Board understands that actual costs to process an 
application may be higher for some FCUs based on geographic location or 
the level of underwriting a particular FCU chooses to conduct. While 
the Board does not expect FCUs to generate a large return from these 
loans, it does not expect FCUs to offer PAL loans at a loss, which 
could threaten the FCUs' safety and soundness.
    The Board could consider increasing the permissible application fee 
without making any other changes or it could increase the fee in 
conjunction with a decrease in the permissible loan interest rate. The 
Board understands that some credit unions prefer not to charge a higher 
interest rate on PAL loans, but must do so to offset the higher degree 
of risk associated with these loans. The Board invites comment on if a 
higher application fee cap alone would encourage more credit unions to 
make PAL loans or if credit unions would prefer any application fee 
increase to be linked with a lower permissible interest rate.
    Although the Board is considering increasing the maximum 
application fee, the Board notes that under

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Regulation Z (Reg Z), an application fee may only serve to recoup the 
actual costs incurred by an FCU to process a PAL loan application. FCUs 
would still need to accurately account for their costs in determining a 
permissible application fee, and they would not be able to use this fee 
to offset losses associated with this type of lending. NCUA will 
continue to scrutinize these fees to ensure compliance with Reg Z and 
ensure PAL loans remain a beneficial product for FCU members.
    In addition to seeking comment on the application fee and interest 
rate, the Board seeks comment on all aspects of the regulation. The 
questions enumerated below are intended to stimulate commenter response 
and suggest areas where NCUA may improve the rule to encourage more 
FCUs to offer PAL loans. Commenters should feel free to comment on any 
aspect of the PAL regulation. Of course, commenters should include 
reasonable justification for all comments provided.

Additional Questions for Consideration

    (1) Should the Board increase the permissible PAL loan interest 
rate, which is currently set at 28% (based on 1000 basis points above 
the maximum interest rate established by the Board for non-PAL loans)?
    (2) Should the Board expand the permissible loan range, which is 
currently set from $200 to $1000?
    (3) Should the Board permit PAL loan maturities of shorter than one 
month or longer than six months?
    (4) Should the Board allow FCUs to make more than one PAL loan at a 
time to a borrower?
    (5) Should the Board eliminate or decrease the one-month minimum 
length of membership requirement?
    (6) Should the Board increase the limit on the permissible 
aggregate dollar amount of loans made, which currently is 20% of an 
FCU's net worth?
    In addition to soliciting comments on the current PAL rule, the 
Board is also interested in learning about viable payday-alternative 
products credit unions are currently offering their members. The Board 
invites commenters to describe products and programs they offer and to 
share details about the business models they use to execute successful 

    By the National Credit Union Administration Board on September 
21, 2012.
Mary Rupp,
Secretary of the Board.
[FR Doc. 2012-23718 Filed 9-26-12; 8:45 am]