NCUA Board Member Todd M. Harper Statement on the Payday Alternative Loans II Final Rule

Thank you, Chairman Hood. And Matt, Joe and Frank, thank you and your teams for your hard work on this Payday Alternative Loans II final rule. I appreciate the staff’s efforts to draft a regulation to provide new options for federal credit unions to offer alternatives to payday loans.

Notably, this rule includes several positive elements that underscore the statutory mission of credit unions to provide fair and affordable credit to people – their members – of modest means. For example, the final rule maintains limits on the usage of payday alternative products to three loans in a six-month period and only one loan at a time. It also maintains restrictions on rollovers.

Maintaining these limits is a positive step toward helping financially distressed consumers avoid a cycle of high-cost debt. Additionally, the final rule prohibits federal credit unions from charging overdraft and non-sufficient funds fees on payday alternative loans. Importantly, the rule further extends the amount of time an alternative payday loan could be repaid to 12 months.

That all being said, I also care deeply about consumer financial protection, about regulations that are right sized, and about providing credit union members with access to fair, responsible, and sustainable loans. I also believe deeply in the core mission of credit unions to provide access to fair and affordable credit to their members, especially people of modest means. For these reasons, I must oppose the overly broad loan amounts contained within the matter before us today, and I will vote against the final rule.

The new rule would significantly expand the loan limits contained in the first payday alternative loan rule of $200 to $1,000. Instead, this new rule would allow loans of all sizes up to $2,000. This is a bridge to far for me to cross.

On the low end, we could see triple-digit effective annual percentage rates. For example, the resulting effective annual percentage rate for a payday alternative loan of $50 charged a $20 application fee would be 140 percent to 840 percent, depending on the term of the loan. And, in my view, payday alternative loans in the range of $1,000 to $2,000 no longer look like payday loans.

In fact, those loan amounts are outside the core limits of what most states allow for payday loans. Short-term payday loans with balloon payments are made in about 34 states. And most of the states cap loan sizes. For example, California limits payday loans to $300 (including the fee), while Delaware caps loans at $1,000.

To me, a payday alternative loan in the range of $1,000 to $2,000 looks more like a personal loan, which many credit unions are already making within the 18-percent cap and with sound underwriting. As the National Federation of Community Development Credit Unions wrote in its comment letter, “The model already exists for credit unions to meet market gaps responsibly within the current regulatory framework.”

The letter goes on to explain that in 2018 community development credit unions alone had nearly $2.5 billion in traditional consumer lending at under the 18-percent APR cap with an average loan size of just under $2,500. Accordingly, we can conclude that credit unions are already regularly making loans at or below the proposed increased threshold.

Additionally, the Arizona-based Center for Economic Integrity wrote in their comment letter that in 2017:

The Arizona Community Action Association surveyed credit unions and other providers to catalog the options available to consumers who need small loans. They identified 41 credit unions (both state and federally chartered) that offered one or more loan products of $500 or less in fourteen counties. These loans cost less than 18% APR, do not incur fees beyond the annual credit union membership fee, help build credit, have no-pre-payment penalties, are easy to apply for and do not require collateral. In some instances, no credit check is needed and the loan includes a savings option.

I know that it is addressed as a best practice in this rulemaking, but the NCUA should be doing more to encourage products that include savings options, not higher-cost loans.

Finally, let’s take a minute to think about who the typical payday loan borrowers is. The median income of a payday loan borrower is $25,000 to $30,000, and forty-nine percent of payday borrowers have a family income of less than $30,000. Additionally, the income of borrowers at storefront payday lenders was $22,476 in 2013.

We also know that over time, payday borrowers’ loans often increase in size and frequency as they try to keep up with the high-cost interest payments and fees. In my view, a $2,000 loan at 28-percent interest could push a financially stressed household into that cycle of deep, unsustainable debt. Amortized over 12 months, the household would pay more than $300 in interest and fees.

If the agency moves forward with a third alternative to payday loans, my hope is that the process will be data driven, address the ability of credit union members to repay such loans, and include savings options.

At this point, however, I will vote no on the final rule we are considering today.  Thank you for the consideration of my views.