A majority of the commenters supported the Board’s proposed PALs II framework but sought additional changes to provide FCUs with more regulatory flexibility. These commenters focused on ways to increase the profitability of PALs loans such as by allowing FCUs to make larger loans with longer maturities, or charge higher fees and interest rates.
Some commenters strongly opposed the proposed PALs II framework. These commenters argued that the proposed framework could blur the distinction between PALs and predatory payday loans, which could lead to greater consumer harm. One commenter in particular argued that the Board has not fully explained why the proposed PALs II framework will encourage more FCUs to offer PALs loans to their members. Instead, these commenters urged the Board to focus on methods to curtail predatory lending by credit unions outside of the PALs I rule and to address potential abuses regarding overdraft fees.
The Board received 54 comments on the PALs II NPRM from 5 credit union trade organizations, 17 state credit union leagues, 5 consumer advocacy groups, 2 state and local governments, 2 charitable organizations, 2 academics, 2 attorneys, 3 credit union service organizations, 14 credit unions, and 2 individuals
An overwhelming majority of these comments related to increasing the allowable interest rate for PALs III loans and giving FCUs greater flexibility to charge a higher application fee. The commenters that were opposed to the proposed PALs II framework similarly were opposed to the creation of a PALs III loan for the reasons noted above.
III. Summary of Final Rule
With the exception of reconsidering the proposed removal of the limit on the number of PAL loans in a rolling 6-month period, the Board is adopting the PALs II framework largely as proposed in the PALs II NPRM. The requirements for PALs II loans will be set out in a new paragraph of the NCUA’s general lending rule, § (c)(7)(iv). The final rule allows an FCU to offer a PALs II loan to a member for any amount up to a maximum loan amount of $2,000. The PALs II loan must carry a loan term of at least 1 month with a maximum loan maturity of 12 months. The FCU may make such a loan immediately upon the borrower establishing membership in the credit union. However, an FCU may only offer one type of PALs loan to a member at any given time. All other requirements of the PALs I rule will continue to apply to PALs II loans including the prohibition against rollovers, the limitation on the number of PALs loans that an FCU can make to a single borrower in a given period, and the requirement that each PALs II loan fully amortize over the life of the loan.
Additionally, the final rule prohibits an FCU from charging any overdraft or non-sufficient funds (NSF) fees in connection with any PALs II loan payment drawn against a borrower’s account. This includes overdraft fees or NSF fees that an FCU could assess against the borrower for paying items presented for payment after the PALs II loan payment creates a negative balance in the borrower’s account. As discussed below, while the Board believes that reasonable and proportional fees assessed in connection with an overdraft loan are appropriate in most cases to compensate an FCU for providing an important source of temporary liquidity to borrowers, the Board has serious fairness concerns regarding this practice in connection with PAL loans given the unique characteristics of payday loan borrowers and the Board’s stated goal of putting individuals on a path to payday loans Virginia mainstream financial products and services.