Ben Morales hasn’t gotten through all 1,341 pages of the CFPB’s proposed new payday and title loan rule but he’s working on it. He’s got a lot riding on it and so does the rest of the credit union industry.
Morales is chief technology and operations officer at Washington State Employees Credit Union ($2.5B, Olympia, WA), where he also is CEO of QCash Financial, a CUSO that provides a small-dollar digital lending platform the credit union itself has extensively used while making 34,000 of the loans in the past year, to the tune of about $28 million.
Morales knows the value of the loans — to members and to the credit union itself — and he and his colleagues are preparing their reply ahead of the Sept. 14 deadline the bureau set for comment on the sweeping proposed rule. (This seven-page CFPB fact sheet hits the high points.)
So should other credit unions, says multiple stakeholders interviewed this week about the new rule rolled out earlier this month. They point to multiple concerns, ranging from new reporting mandates to requirements that could force them to fully underwrite a small-dollar loan. They urge commenting and advise making it personal, sharing specifics about how the loans help and how the new rules would hurt.
The CFPB lays out its case against “payday debt traps” here. The bureau has provided a carve out for credit unions that lend under the NCUA’s payday alternative loan (PAL) program, but only about 700 credit unions offer those, which currently carry a 28% APR cap and limit application fees to $20, making it a fee-inclusive 36%. Loans sizes are limited to between $200 and $1,000, terms to 45 days to six months, and no more than three of the loans can be made each six months.
Suzanne Yashewski, senior vice president and regulatory compliance counsel at the Cornerstone Credit Union, puts it bluntly: “The proposed rule would likely drive credit unions out of the small-dollar, short-term loan market as well as the auto loan refinance market.”
Reaction Could Define Movement
The proposed rule could have the largest consumer financial impact in decades and how credit unions react will help define and position the movement going forward, says Scott Butterfield, credit union strategist and consultant with Your Credit Union Partner.
“In many ways, the level of credit union response to this issue will reflect how seriously we perceive our role as consumer advocates. On one hand, most of us advocate against payday loans, but at the same time, many of us really don’t have a viable short-term loan product or delivery system to replace it,” Butterfield says.
Butterfield says that while short-term, small-dollar loans loan products don’t make up a large portion of credit union loan portfolios, they are among the highest-yielding and are heavily used by those borrowers dependent on them.
“There are portions of this rule that could be troubling,” Butterfield says. He points to the requirement to verify borrowers' ability to promptly repay loans, and be prevented from repeatedly issuing loans to the same consumers.
“This will create a vacuum since an estimated 80% of payday borrowers take out another loan within 30 days. This could limit consumer access to non-predatory credit union products and it could also limit the number of credit unions willing to get into this space to fill a potential void,” says the consultant to more than 100 credit unions.
If payday loans materially go away, there is bound to be a huge consumer impact and it won’t all be good, Butterfield says.
“This may be a moment of truth for credit unions to demonstrate a leadership role as a relevant consumer advocate,” he says.
All Credit Unions Are Affected
All credit unions will fall under the CFPB rule, regardless of asset size, since the $10 billion bureau threshold applies only to supervisory issues.
There also are some provisions that Morales at WSECU and QCash says he just doesn’t understand, including one that says if the losses on a small-dollar lending program exceed 5% than the lender has to refund fees.
“That’s not the charge-off rate, that’s the whole program performance,” Morales says. “It doesn’t seem to make sense.” And that’s not to be confused with the rule’s limiting to 5% the amount of a consumer’s monthly gross income that can be devoted to paying back the loan.
“It’s all pretty confusing, but our preliminary analysis is that there are things we’re going to need to add,” Morales said, including notifications about how many times payments can be debited without new authorization and how often the loans can be repeated or rolled over.
WSECU and QCash Financial are preparing their response and Morales urges other credit unions to do the same.
“We feel like it’s adding layers of regulations on top of other regulations and it’s just not needed,” Morales says.
Pamela Owens, vice president of the National Federation of Community Development Credit Unions, says the new rule recognizes the work credit unions have done over the years to provide safe, affordable loans and says that most credit union PAL loans won’t be affected.
She says she’s concerned about loopholes that could allow a borrower to take out six loans annually without “appropriate safeguards in place to ensure the borrower could repay the loans.” She also encouraged credit unions to comment.
Meanwhile, others feel like the new rules also may not go far enough. That includes the Pew Charitable Trusts, which has been studying the issue and advocating for consumer protections. Here is its initial formal response: “CFPB’s Proposed Payday Loan Rule Misses Historic Opportunity.”
Three Things To Mention
However, Alex Horowitz, senior research officer for Pew’s small-dollar loan project, says credit unions should weigh in. He specifically encourages financial cooperatives to speak in favor of:
1) The steps the CFPB took to accommodate the NCUA PAL program.
2) Including the 5% payment standard in the final rule so that credit unions that do not use the PAL program have a viable way to serve their members.
3) Tougher underwriting standards for the 400% APR payday installment loans that payday lenders will issue under this proposed rule.
He also notes that credit unions that charge an annual fee, monthly fee, larger application fee, or origination fee are also covered by the CFPB rule, and without clear standards for acceptable terms, would be required to conduct a full underwrite before issuing a small loan.
Credit unions can make the CFPB standards work, Horowitz says, pointing to Kinecta Federal Credit Union ($3.9B, Manhattan Beach, CA) and the “Payday Payoff Loan,” which sets payments at 5% of each paycheck and are offered through the credit union’s Nix Neighborhood Lending operation.
In fact, others argue, credit unions have long done business that way, and the CFPB comment period is an opportunity to make that case.
A Timely Voice, Political Cover
“Credit unions came into existence based on small-dollar loans back in the Depression and they should continue to offer consumers that important product in the manner that is sustainable for credit unions and beneficial for consumers,” says Andrew Downin, managing director of innovation at the Filene Research Institute.
“This is a timely opportunity for credit unions to have a voice in this conversation, and regardless of their specific position on the CFPB's proposed payday lending rules, they should consider submitting their comments during the feedback period,” Downin says.
And personalize the story. “The CFPB has already heard from NAFCU and CUNA and they expect to hear more, but they believe that the trade associations are just doing their jobs of being advocates for credit unions,” says veteran credit union attorney Andy Keeney.
Not all have spoken up yet. “NASCUS is still considering whether to comment on this, although the proposal is driving some conversation among our members,” says Pat Keefe, that trade group’s vice president of communications. “What I'm hearing among those watching this proposal closely is that there is going to be a final rule —and that the opportunity to comment by credit unions shouldn't be ignored.”
Keefe says he’s also been told by people who have written to the CFPB that the bureau “has a track record of paying attention to the comments that they receive.”
Keeney agrees and adds a political perspective. The Virginia-based attorney says comments that speak to how a specific credit union provides fair and reasonable alternatives to payday lending could get attention from CFPB regulators and congressmen alike.
Indeed, the House Appropriations Committee already has approved delaying the new rule’s enforcement until the CFPB provides a detailed report on the new rule’s impact, including identifying existing products that would replace sources of small-dollar loans.
“FCUs have statutory limits on interest rates and receive significant guidance from the NCUA, all of which might give some political cover to the CFPB to limit applicability of the new rules to credit unions,” Keeney adds.
Cindy Williams, vice president of regulatory compliance at the Iowa-based PolicyWorks consultancy, advises keeping it real, too. “Credit unions should provide anecdotal information in their comment letters. Share real situations that demonstrate a legitimate need for this type of service,” she says.
Driving Credit Unions Away
Donna Cameron, director of Regulatory I/O at Continuity, says to make sure to include the impact that increased costs and resources devoted to compliance would have on credit unions under the new CFPB rule.
For instance, she said, lenders would be required to obtain reports from “specialty consumer reporting agencies” that would be registered with the CFPB.
They also would also be forced to furnish loan information to these registered agencies.
“The costs associated with obtaining reports, as well as the additional work steps required to review them or furnish information, would represent a new burden for credit unions,” Cameron says.
She says modifying institutional practices “sets in motion a slew of implementation costs ranging from interpreting the requirements, to buying or creating compliant forms and disclosures, to training staff on when and how to deliver disclosures and notices.”
And Yashewski at Cornerstone — which serves credit unions in Texas, Oklahoma, Arkansas — says as worded, the CFPB regulations could stop credit unions — including those operating under the NCUA PAL program — from even offering auto loan refinances that include add-ons such as Gap and credit life insurance.
“If we discontinue these services, credit union members lose in the end,” Yashewski says. “Credit unions must comment on this very important issue to ensure that the final rule permits our industry to continue to serve the needs of credit union members.”
Credit unions will have to wait a bit to comment. The CFPB has posted a blog that says it will update its website to include the link to www.regulations.gov as soon as the proposal is published in the Federal Register “in the coming weeks.”