- The National Credit Union Administration (NCUA) agreed Thursday to let credit unions double the amount of money they offer in a payday alternative loan (PAL).
- The new PALs II does not replace the existing loan option but expands on it. Whereas the PAL allows credit unions to offer loans between $200 and $1,000, PALs II sets the upper limit at $2,000. And while the term of a PAL can range from one to six months, PALs II allows customers to carry the loan for up to a year, according to the final rule.
- PALs II maintains its predecessor's maximum interest rate of 28%. Borrowers can take out up to three PALs II over a six-month period, but they're limited to one type of PAL at a time.
PALs and PALs II are meant to steer credit union members away from predatory payday loans that, according to Pew Charitable Trusts research, hold annual percentage rates averaging 391%. The NCUA's loan vehicles give borrowers considerably more time for payback than payday loans, which mature in 14 days.
Payday loans also tend to catch borrowers up in a cycle of debt. About 80% of payday loans are taken out within two weeks of repayment of a previous payday loan, the Consumer Financial Protection Bureau (CFPB) found. And three-quarters of payday loans go to customers who take out 11 or more of the loans per year, according to the CFPB.
NCUA Chairman Rodney Hood applauded his agency's new offering, saying it adds another small-dollar lending solution to the marketplace. "We want to encourage responsible lending that allows consumers to address immediate needs while working towards fuller financial inclusion," he said. Small-dollar loan programs "must strike the balance between flexibility and consumer protection," Hood told Credit Union Times.
The NCUA's new option didn't gain unanimous approval, however. The agency's board approved the final rule 2-1, with board member Todd Harper saying the $2,000 limit is too high. "That is a bridge too far for me to climb," he told Credit Union Times, adding that PALs II looks more like a personal loan and could trigger a cycle of debt for a family living paycheck to paycheck.
Fellow NCUA board member J. Mark McWatters, on the other hand, inferred that the loan should be higher, according to Credit Union Times.
The final rule is set to become effective 60 days after it's published in the Federal Register.