[Federal Register Volume 84, Number 190 (Tuesday, October 1, 2019)]
[Rules and Regulations]
[Pages 51942-51952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20821]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701

RIN 3133-AE84


Payday Alternative Loans

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA Board (Board) is issuing a final rule (referred to as 
the PALs II rule) to allow federal credit unions (FCUs) to offer 
additional payday alternative loans (PALs) to their members. The final 
rule does not replace the NCUA's current PALs rule (referred to as the 
PALs I rule). Rather, the PALs II rule grants FCUs additional 
flexibility to offer their members meaningful alternatives to 
traditional payday loans while maintaining many of the key structural 
safeguards of the PALs I rule.

DATES: The final rule is effective on December 2, 2019.

FOR FURTHER INFORMATION CONTACT: Matthew Biliouris, Director, Office of 
Consumer Financial Protection; Joseph Goldberg, Director, Division of 
Consumer Compliance Policy and Outreach, Office of Consumer Financial 
Protection; or Marvin Shaw, Staff Attorney, Division of Regulations and 
Legislation, Office of General Counsel; 1775 Duke Street, Alexandria, 
VA 22314-6113 or telephone: (703) 518-1140 (Messrs. Biliouris and 
Goldberg), or (703) 518-6540 (Mr. Shaw).

SUPPLEMENTARY INFORMATION: 

I. Background
II. Summary of Comments
III. Summary of the Final Rule
IV. Statement of Legal Authority
V. Section-by-Section Analysis
VI. Regulatory Procedures

I. Background

    Federal credit unions (FCUs) provide individuals of modest means 
access to affordable credit for productive and provident purposes.\1\ 
This core credit union mission puts FCUs in natural competition with 
short-term, small-dollar lenders that offer payday, vehicle title, and 
other high-cost installment loans to borrowers of modest means.\2\
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    \1\ See Credit Union Membership Access Act, Public Law 105-219, 
section 2, 112 Stat. 913 (Aug. 7, 1998) (codified as 12 U.S.C. 1751 
note).
    \2\ Roy F. Bergengren, Co[ouml]perative Credit, 191 The Annals 
of the American Academy of Political and Social Science 144-148 
(1937).
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    A ``payday loan'' generally refers to a short-term, small-dollar 
loan repayable in one or more installments with repayment secured by a 
pre- or post-dated check or a preauthorized electronic fund transfer 
(EFT) from the borrower's checking account.\3\ A payday loan usually 
matures in 14 days, around the borrower's next payday, at which time 
the borrower is often required to repay the loan in a single balloon 
payment. The borrower typically does not pay interest on a payday loan. 
Rather, payday lenders charge high ``application'' fees relative to the 
amount borrowed, which typically range between $15 and $35 per 100 
borrowed.\4\ This pricing structure produces a triple-digit annual 
percentage rate (APR).\5\
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    \3\ Robert W. Snarr, Jr., Fed. Reserve Bank of Phila., No Cash 
`til Payday: The Payday Lending Industry, Compliance Corner (1st 
Quarter 2002) available at www.philadelphiafed.org/bank-resources/publications/compliance-corner/2002/first-quarter/q1cc1_02.cfm.
    \4\ See National Consumer Law Center, Consumer Credit Regulation 
403-6 (1st ed. 2012).
    \5\ The ``annual percentage rate'' is a ``measure of the cost of 
credit, expressed as a yearly rate.'' 12 CFR 1026.14(a).
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    Despite marketing payday loans as a temporary lifeline to 
borrowers, most payday lenders refinance or ``rollover'' the borrower's 
initial payday loan charging additional fees without a significant 
economic benefit to the borrower. In fact, the Center for Responsible 
Lending estimates that 76 percent of payday loans are rollovers.\6\ 
Borrowers most often rollover a payday loan because the borrower does 
not have the ability to repay the initial loan upon maturity or will 
have limited funds to meet other obligations.\7\ This pattern of 
repeated borrowings creates a ``cycle of debt'' that can increase the 
borrower's risk of becoming unbanked, filing for bankruptcy, or 
experiencing severe financial hardship.\8\
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    \6\ Uriah King & Leslie Parrish, Center for Responsible Lending, 
Phantom Demand: Short-Term Due Date Generates 76% of Total Volume 15 
(July 2009) available at www.responsiblelending.org/payday-lending/research-analysis/phantom-demand-short-term-due-date-genderates-need-for-repeat-payday-loans-accounting-for-76-of-total-volume.html.
    \7\ Id.
    \8\ Id.
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2010 Payday Alternative Loan Rulemaking (PALs I Rule)

    In 2010, the Board amended the NCUA's general lending rule, Sec.  
701.21, to provide a regulatory framework for FCUs to make viable 
alternatives to payday loans, the PALs I rule.\9\ The PALs I rule, 
Sec.  701.21(c)(7)(iii), permits an FCU to offer to its members a PAL 
loan, a form of closed-end consumer credit, at a higher APR than other 
credit union loans as long as the PAL has certain structural features, 
developed by the Board, to protect borrowers from predatory payday 
lending practices that can trap borrowers in repeated borrowing cycles.
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    \9\ Short-Term, Small Amount Loans, 75 FR 58285 (Sept. 24, 
2010).
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    For example, the PALs I rule eliminates the potential for ``loan 
churning,'' the practice of inducing a borrower to repay an existing 
loan with another loan without significant economic benefit to the 
borrower, by prohibiting an FCU from rolling one PALs I loan into 
another PALs I loan.\10\ As the Board previously explained, ``these 
provisions of the [PALs I rule] will work to curtail a member's 
repetitive use and reliance on this type of product, which often 
compounds the member's already unstable financial condition . . . The 
Board recognizes that continuously `rolling-over' a loan can subject a 
borrower to additional fees and repayment amounts that are 
substantially more than the initial amount borrowed.'' \11\ However, to 
avoid the possibility of a default in cases where the borrower cannot 
repay the initial PAL loan, an FCU may extend the maturity of an 
existing PALs I loan to the maximum term limit permissible under the 
regulation as long as the borrower does not pay any additional fees or 
receive additional credit. An FCU may also refinance a traditional 
payday loan into a PALs I loan.\12\
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    \10\ 12 CFR 701.21(c)(7)(iii)(A)(4).
    \11\ Short-Term, Small Amount Loans, 75 FR 24497, 24499 (May 5, 
2010).
    \12\ Short-Term, Small Amount Loans, 75 FR 58285, 58286 (Sept. 
24, 2010).
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    The PALs I rule also eliminates the underlying borrower payment 
shock from a single balloon payment, which often forces a borrower to 
rollover a payday loan, by requiring that each PAL loan fully amortize 
over the life of the loan.\13\ As the Board previously stated in the 
preamble to the final PALs I rule, ``balloon payments often create 
additional difficulty for borrowers trying to repay their loans, and 
requiring FCUs to fully amortize the loans will allow borrowers to make 
manageable payments over the term of the loan, rather than trying to 
make one large payment.'' \14\ Accordingly, an FCU must structure a 
PALs I loan so that a member repays principal and interest in

[[Page 51943]]

approximately equal installments on a periodic basis until loan 
maturity.\15\ While the Board does not prescribe a specific payment 
schedule--e.g., bi-weekly or monthly--the Board expects an FCU to 
structure the repayment of each PALs I loan to ensure that the member 
has a reasonable ability to repay the loan without the need for another 
PALs I loan or traditional payday loan. Accordingly, an FCU may not 
require that a borrower repay a PAL loan using a single balloon 
payment.
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    \13\ 12 CFR 701.21(c)(7)(iii)(A)(5).
    \14\ Short-Term, Small Amount Loans, 75 FR 58285, 58287 (Sept. 
24, 2010).
    \15\ Id.
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    Moreover, the PALs I rule removes the economic incentive for an FCU 
to encourage a borrower to take out multiple PALs I loans by limiting 
the permissible fees that an FCU may charge that borrower to a 
reasonable application fee.\16\ The non-credit union payday lending 
business model depends on repeated borrowings from a single borrower of 
small dollar amounts with high fees and associated charges. A 
traditional payday lender has every incentive to make multiple payday 
loans to that borrower to maximize the profitability of that 
relationship at the expense of the borrower. By limiting the scope of 
permissible fees, the PALs I rule realigns economic incentives to 
encourage an FCU to provide a PALs I loan as a pathway towards 
mainstream financial products and services rather than as a separate 
profit center for the credit union.
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    \16\ 12 CFR 701.21(c)(7)(iii)(A)(3).
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    The Board recognizes that the PALs I rule contains recommended best 
practices that, when exercised in conjunction with a PALs I loan, help 
put credit union members on the pathway to mainstream financial 
products and services. This includes reporting to credit reporting 
agencies and providing financial education. As of December 2018, almost 
eighty-five percent of FCUs reported sharing PALs I loan information 
with credit reporting agencies and nearly forty-five percent reported 
providing financial education services to PALs I loan borrowers. The 
Board commends FCUs for undertaking these additional steps to assist 
their members.

2012 Payday Alternative Loan Advanced Notice of Proposed Rulemaking 
(PALs I ANPR)

    As part of the 2010 rule making process, the Board indicated that 
it would review PALs I loan data collected on FCU call reports after 
one year to reevaluate the requirements of the PALs I rule.\17\ As of 
September 2011, 372 FCUs offered PALs I loans with an aggregate balance 
of $13.6 million or 36,768 outstanding loans. Six months later, as of 
March 31, 2012, approximately 386 FCUs reported offering PALs I loans 
with an aggregate balance of $13.5 million on 38,749 outstanding loans. 
While the Board acknowledged at that time that some FCUs might make an 
independent business decision not to offer PALs I loans, it 
nevertheless sought to increase the number of FCUs making PALs I loans 
in a meaningful way and to ensure that all FCUs that chose to offer 
PALs I loans were able to recover the costs associated with making 
these types of loans.
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    \17\ 75 FR 58285, 58288 (Sept. 24, 2010).
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    For that reason, the Board issued an advanced notice of proposed 
rulemaking (PALs I ANPR) seeking comments on specific aspects of the 
PALs I rule at its September 2012 meeting.\18\ These questions 
included, but were not limited to, asking whether the Board should 
allow an FCU to charge a higher application fee, whether the Board 
should increase the permissible PALs I loan interest rate, and whether 
the Board should expand the maximum permissible loan amount. The Board 
also asked commenters to provide information on any small dollar, 
short-term loans offered outside of the PALs I rule.
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    \18\ Payday-Alternative Loans, 77 FR 59346 (Sept. 27, 2012).
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    The Board received comments from trade organizations, state credit 
union leagues, consumer advocacy groups, lending networks, private 
citizens, and FCUs suggesting changes to at least one aspect of the 
PALs I rule. However, these commenters offered no consensus regarding 
which aspects of the PALs I rule the Board should modify. Consequently, 
the Board chose not to undertake any changes to the PALs I rule at that 
time.

2018 Payday Alternative Loan II Notice of Proposed Rulemaking (PALs II 
NPRM)

    In May 2018, the Board approved a notice of proposed rulemaking to 
amend the NCUA's general lending rule to allow FCUs to make an 
additional viable alternative to predatory payday loans (PALs II 
NPRM).\19\ As of December 2017, 518 FCUs reported offering PALs I loans 
with 190,723 outstanding loans and an aggregate balance of $132.4 
million.\20\ These figures represent a significant increase in loan 
volume from 2012 when the Board issued the PALs I ANPR. However, the 
number of FCUs offering these products has only grown modestly.
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    \19\ Payday Alternative Loans, 83 FR 25583 (June 4, 2018).
    \20\ As of December 2018, 606 FCUs reported offering PALs I 
loans with 211,589 outstanding loans and an aggregate balance of 
$145.2 million.
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    The purpose of the PALs II NPRM was to provide FCUs with additional 
flexibility to offer PALs loans to their members. The PALs II NPRM did 
not propose to replace the PALs I rule. Rather, it allowed an FCU to 
offer a more flexible PALs loan while retaining key structural features 
of the PALs I rule designed to protect consumers from predatory payday 
lending practices, including restrictions on permissible fees, 
rollovers, and amortization. The Board intended the PALs I rule and 
proposed PALs II rule to create distinct products (referred to in this 
document, respectively, as PALs I and PALs II loans) that must satisfy 
similar regulatory requirements tailored to the unique aspects of each 
product.
Features Incorporated From the PALs I Rule
    The PALs II NPRM proposed to incorporate many of the structural 
features of the PALs I rule designed to protect borrowers from 
predatory payday lending practices. Those features included a 
limitation on rollovers, a requirement that each PALs II loan must 
fully amortize over the life of the loan, and a limitation on the 
permissible fees that an FCU may charge a borrower related to a PALs II 
loan. An FCU would also have had to structure each loan as closed-end 
consumer credit. As discussed in more detail below, the PALs II NPRM 
modified other features of the PALs I rule for PALs II loans. The 
purpose of these modifications was to encourage additional FCUs to 
offer PALs II loans as an alternative to predatory payday loans and to 
meet the needs of certain payday loan borrowers that may not be met by 
PALs I loans.
Loan Amount
    The PALs II NPRM proposed to allow an FCU to make a PALs II loan 
for a loan amount up to $2,000 without any minimum loan amount. The 
PALs I rule currently limits PALs I loan amounts to a minimum of $200 
and a maximum of $1,000.\21\ The PALs II NPRM noted that allowing a 
higher loan amount would give an FCU the opportunity to meet increased 
demand for higher loan amounts from payday loan borrowers and provide 
some borrowers with an opportunity to consolidate multiple payday loans 
into one PALs II loan. The Board was particularly interested in 
allowing a sufficient loan amount to encourage borrowers to consolidate

[[Page 51944]]

payday loans into PALs II loans to create a pathway to mainstream 
financial products and services offered by credit unions.
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    \21\ See 12 CFR 701.21(c)(7)(iii)(A)(1).
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Loan Term
    Consistent with the proposal to increase the permissible loan 
amount to $2,000, the PALs II NPRM proposed increasing the maximum loan 
term for a PALs II loan to 12 months. The PALs I rule currently limits 
PALs I loan maturities to a maximum term of 6 months.\22\ The increased 
loan term would allow a borrower sufficient time to repay their loans, 
thereby avoiding the types of borrower payment shock common in the 
payday lending industry that force borrowers to repeatedly rollover 
payday loans. The PALs II NPRM noted that an FCU would be free to 
choose an appropriate loan term, provided the loan fully amortized, and 
encouraged FCUs to select loan terms that were in the best financial 
interests of PALs II borrowers.
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    \22\ See 12 CFR 701.21(c)(7)(iii)(A)(2).
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Membership Requirement
    The PALs II NPRM also proposed to allow an FCU to offer a PALs II 
loan to any member regardless of the length of membership. The PALs I 
rule currently requires a borrower to be a member of the credit union 
for at least one month before receiving a PALs I loan.\23\ The PALs II 
NPRM eliminated the membership time requirement to allow an FCU to make 
a PALs II loan to any member borrower that needed access to funds 
immediately and would otherwise turn to a payday lender to meet that 
need. Nevertheless, the PALs II NPRM still encouraged FCUs to consider 
a minimum membership requirement as a matter of prudent underwriting.
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    \23\ See 12 CFR 701.21(c)(7)(iii)(A)(6).
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Number of Loans
    Finally, the PALs II NPRM proposed to remove the restriction on the 
number of PALs II loans that an FCU may make to a single borrower in a 
rolling 6-month period. The PALs I rule currently prohibits an FCU from 
making more than three PALs loans in a rolling 6-month period to a 
single borrower.\24\ An FCU also may not make more than one PALs I loan 
to a borrower at a time. The Board suggested removing the rolling 6-
month requirement for PALs II loans to provide FCU's with maximum 
flexibility to meet borrower demand. However, the PALs II NPRM proposed 
to retain the requirement from the PALs I rule that an FCU can only 
make one loan at a time to any one borrower. Accordingly, the PALs II 
NPRM did not allow an FCU to provide more than one PALs product, 
whether a PALs I or PALs II loan, to a single borrower at a given time.
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    \24\ See 12 CFR 701.21(c)(7)(iii)(A)(3).
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Request for Additional Comments
    In addition to the proposed PALs II framework, the PALs II NPRM 
asked general questions about PAL loans, including whether the Board 
should prohibit an FCU from charging overdraft fees for any PAL loan 
payments drawn against a member's account. The PALs II NPRM also asked 
questions, in the nature of an ANPR, about whether the Board should 
create an additional kind of PAL loan, referred to as PALs III, which 
would be even more flexible than what the Board proposed in the PALs II 
NPRM. Before proposing a PALs III loan, the PALs II NPRM sought to 
gauge industry demand for such a product, as well as solicit comment on 
what features and loan structures should be included in a PALs III 
loan.

II. Summary of Comments on the PALs II NPRM

    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. 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.
    Most commenters offered at least some suggestions on the creation 
of a PALs III loan. 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, Sec.  701.21(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 mainstream 
financial products and services.
    Lastly, the final rule does not take any immediate action with 
regard to PALs III loans. The Board has taken the comments regarding a 
PALs III loan under advisement and will determine whether future action 
is necessary.

[[Page 51945]]

IV. Statement of Legal Authority

    The Board is issuing this final rule pursuant to its plenary 
regulatory authority to administer the Federal Credit Union Act (FCU 
Act) \25\ and its specific authority to adopt rules and regulations 
that it deems necessary or appropriate to ensure the safety and 
soundness of the credit union system and the National Credit Union 
Share Insurance Fund (NCUSIF).\26\ Given the historic mission of credit 
unions to serve individuals of modest means, the importance of 
providing these individuals with a realistic pathway towards mainstream 
financial products and services, and the high fixed costs associated 
with offering viable alternatives to payday loans, this final rule is 
an appropriate exercise of the Board's regulatory authority.
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    \25\ 12 U.S.C. 1766(a).
    \26\ 12 U.S.C. 1789(a)(11).
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V. Section-by-Section Analysis

    Because the PALs II NPRM proposed to apply many of the requirements 
of the PALs I rule to PALs II loans, the Board received numerous 
comments regarding the PALs I rule. The Board addresses those comments 
below in a section-by-section analysis of the PALs I rule, Sec.  
701.21(c)(7)(iii). With the exception of one clarification regarding 
the aggregate concentration limit set out in Sec.  
701.21(c)(7)(iii)(A)(8), the Board is not adopting any changes to the 
PALs I rule. However, in response to questions raised by several 
commenters, the Board does provide additional guidance below regarding 
application fees and underwriting criteria. Specific comments related 
to the PALs II NPRM are discussed in the section-by-section analysis of 
Sec.  701.21(c)(7)(iv), which contains the new PALs II rule.

Section 701.21(c)(7)(iii)--Payday Alternative Loans (PALs I)

Section 701.21(c)(7)(iii)(A)--Minimum Requirements for PALs I

    Section 701.21(c)(7)(iii)(A) permits an FCU to charge an interest 
rate that is 1000 basis points above the usury ceiling established by 
the Board under the NCUA's general lending rule. The current usury 
ceiling is 18 percent inclusive of all finance charges.\27\ For PALs I 
loans, this means that the maximum interest rate that an FCU may charge 
for a PAL is currently 28 percent inclusive of all finance charges.
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    \27\ Historically, the Board has interpreted the term ``finance 
charge'' in the NCUA's general lending rule consistently with that 
term in the Truth in Lending Act, 15 U.S.C. 1601 et seq., and the 
Consumer Financial Protection Bureau's implementing regulation, 
Regulation Z, 12 CFR part 1026. See e.g. Payday Lending, Letter to 
Federal Credit Unions 09-FCU-05 (July 2009) (``NCUA's long standing 
policy has been to look to the definition of `finance charge' in 
Regulation Z'').
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    Many commenters requested that the Board increase the maximum 
interest rate that an FCU may charge for a PALs loan to 36 percent. 
These commenters noted that a 36 percent maximum interest rate would 
mirror the rate used by the Consumer Financial Protection Bureau (CFPB 
or Bureau) to determine whether certain high-cost loans are ``covered 
loans'' within the meaning of the Bureau's Payday, Vehicle Title, and 
Certain High-Cost Installment Loans Rule (payday lending rule) \28\ and 
maximum interest rate allowed for active duty service members under the 
Military Lending Act,\29\ providing a measure of regulatory uniformity 
for FCUs offering PALs loans. These commenters also argued that 
increasing the maximum interest rate to 36 percent would allow FCUs to 
compete more effectively with insured depository institutions and 
payday lenders for market share in this market.
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    \28\ 12 CFR 1041.3(b)(3)(i).
    \29\ 10 U.S.C. 987; 32 CFR part 232.
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    In contrast, two commenters argued that a 28 percent interest rate 
is sufficient for FCUs. These commenters stated that on higher dollar 
loans with longer maturities, the current maximum interest rate of 28 
percent is enough to allow an FCU to make PALs loans profitably. 
Another commenter noted that many credit unions are able to make PALs 
loans profitably at 18 percent, which it believed is evidence that the 
higher maximum interest rate is unnecessary.
    Since the Board originally adopted the PALs I rule, it has observed 
substantial ongoing changes in the payday lending marketplace. Given 
all of these developments, the Board does not believe it is appropriate 
to adjust the maximum interest rate for PALs loans, whether a PALs I 
loan or PALs II loan, without further study. Furthermore, the Board 
notes that both the Bureau's payday lending rule and the Military 
Lending Act use an all-inclusive interest rate limit that may or may 
not include some of the fees, such as an application fee, that are 
permissible for PALs loans. Accordingly, the Board will continue to 
consider the commenters' suggestions and may revisit the maximum 
interest rate allowed for PALs loans if appropriate.

Section 701.21(c)(7)(iii)(A)(3)

    Section 701.21(c)(7)(iii)(A)(3) limits the number of PALs I loans 
that an FCU can make to three in a rolling 6-month period to any one 
borrower. An FCU also may not make more than one PALs I loan at a time 
to a borrower. To account for the adoption of the PALs II rule, the 
final rule amends this section to clarify that an FCU may not offer 
more than one PALs loan, whether a PALs I or PALs II loan, to a 
borrower at a time.
    Some commenters argued that the limitation on the number of PALs 
loans that a borrower may receive at a given time would force borrowers 
to take out a payday loan if the borrower needs additional funds. 
However, the Board believes that this limitation places a meaningful 
restraint on the ability of a borrower to take out multiple PALs loans 
at an FCU, which could jeopardize the borrower's ability to repay each 
of these loans. While a pattern of repeated or multiple borrowings may 
be common in the payday lending industry, the Board believes that 
allowing FCUs to engage in such a practice would defeat one of the 
purposes of PALs loans, which is to provide borrowers with a pathway 
towards mainstream financial products and services offered by credit 
unions.

Section 701.21(c)(7)(iii)(A)(7)

    Section 701.21(c)(7)(iii)(A)(7) permits an FCU to charge a 
reasonable application fee, not to exceed $20, to all members applying 
for a PALs I loan. The Board interprets the term ``application fee,'' 
as used in the PALs I rule, consistently with that of the CFPB's 
Regulation Z. Accordingly, in order to qualify as an ``application 
fee'' under the PALs I rule, an FCU must use the charge to recover 
actual costs associated with processing an individual application for 
credit such as credit reports, credit investigations, and 
appraisals.\30\ An application fee that exceeds the actual cost of 
processing a borrower's application is a finance charge under 
Regulation Z that must be included in the APR and measured against the 
usury ceiling in the NCUA's rules.\31\
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    \30\ 12 CFR 1026.4(c)(1).
    \31\ See 12 CFR part 1026, Supp. I, comment 4(c)(1)-1.
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    In response to the PALs II NPRM, several commenters argued that the 
current application fee limit of $20 is too low to allow an FCU to 
recover the actual costs of processing applications. The majority of 
these commenters recommended that the Board set the application fee 
limit between $40 and $50 to create an incentive for more FCUs to offer 
PALs loans to their members. Because of the limited underwriting 
involved with a PALs loan, the Board does not believe that an

[[Page 51946]]

application fee limit between $40 and $50 is appropriate. While one 
commenter provided a revenue model to help illustrate the potential 
cost of making a PALs loan, a majority of the commenters have not 
provided sufficient data to support their conclusion that the $20 
application fee limit is too low to allow any FCU to recover the actual 
costs of processing applications. Furthermore, the Board believes that 
an increased application fee limit creates unnecessary potential for 
abuse by an FCU that may use a higher application fee as concealed 
interest to compensate the credit union for the risk of loss associated 
with making a PALs loan.
    Other commenters asked the Board to clarify whether an application 
fee may reflect staff and technology costs, investing in loan 
processing automation, third-party service provider costs, and 
advertising. As noted above, the Board interprets the term 
``application fee'' in the PALs I rule consistently with Regulation Z. 
An application fee must reflect the actual and direct costs associated 
with processing an individual application. While certain third-party 
service provider costs may be included in the application fee, 
especially if the FCU offers a PALs loan through a third-party vendor 
and passes any costs associated with using that vendor onto the member 
borrower, the Board does not believe that other costs, such as 
investing in loan processing automation or advertising costs, are 
actual and direct costs associated with processing a borrower's 
application. Rather, these costs are general business expenses incurred 
as part of credit union operations and do not relate to costs 
specifically incurred processing a borrower's PALs loan application.
    One commenter stated that the Board should only permit one 
application fee per year. This commenter argued that the limited 
underwriting of a PALs loan does not justify allowing an FCU to charge 
an application fee for each PALs loan. Another commenter similarly 
requested that the Board adopt some limit on the number of application 
fees that an FCU may charge for PALs loans in a given year. The Board 
appreciates the commenters concerns about the burden excessive fees 
place on borrowers. This is particularly relevant in this area. 
However, the Board must balance the need to provide a safe product for 
borrowers with the need to create sufficient incentives to encourage 
FCUs to make PALs loans. The Board believes that its current approach 
of allowing FCUs to charge a reasonable application fee, consistent 
with Regulation Z, which does not exceed $20, provides the appropriate 
balance between these two objectives.
    Several commenters also suggested that the Board permit an FCU to 
charge a monthly service fee for PALs loans. As noted above, the Board 
interprets the term ``finance charge,'' as used in the FCU Act, 
consistently with Regulation Z. A monthly service fee is a finance 
charge under Regulation Z.\32\ Consequently, the monthly service fee 
would be included in the APR and measured against the usury ceiling in 
the NCUA's rules. Therefore, while the PALs I rule does not prohibit an 
FCU from charging a monthly service fee, the Board believes that such a 
fee will be of little practical value to an FCU because any monthly 
service fee income likely would reduce the amount of interest income an 
FCU could receive from the borrower or would push the APR over the 
applicable usury ceiling.
---------------------------------------------------------------------------

    \32\ See 12 CFR 1026.4(b)(2).
---------------------------------------------------------------------------

Section 701.21(c)(7)(iii)(A)(8)

    Section 701.21(c)(7)(iii)(A)(8) requires an FCU to include a limit 
on the aggregate dollar amount of PALs I loans in its written lending 
policies. Under no circumstances may the total amount of PALs I loans 
be greater than 20 percent of the FCU's net worth. This provision also 
requires an FCU to adopt appropriate underwriting guidelines to 
minimize the risks related to PALs I loans. A set of best practices for 
PALs I loan underwriting is included as guidance in Sec.  
701.21(c)(7)(iii)(B)(2).
    The final rule amends Sec.  701.21(c)(7)(iii)(A)(8) to clarify that 
the 20 percent aggregate limit applies to both PALs I and PALs II 
loans. The Board adopted this limit in the PALs I rule as a precaution 
to avoid unnecessary concentration risk for FCUs engaged in this type 
of activity. While the Board indicated that it might consider raising 
the limit later based on the success of FCU PAL programs, the Board has 
insufficient data to justify increasing the aggregate limit for either 
PALs I or PALs II loans at this time. Rather, based on the increased 
risk to FCUs related to high-cost, small-dollar lending, the Board 
believes that the 20 percent aggregate limit for both PALs I and PALs 
II loans is appropriate. The final rule includes a corresponding 
provision in Sec.  701.21(c)(7)(iv)(8) to avoid any confusion regarding 
the applicability of the aggregate limit to PALs I and PALs II loans.
    Many commenters asked the Board to exempt low-income credit unions 
(LICUs) and credit unions designated as community development financial 
institutions (CDFIs) from the 20 percent aggregate limit for PALs 
loans. These commenters argued that making PALs loans is part of the 
mission of LICUs and CDFIs and, therefore, the Board should not hinder 
these credit unions from making PALs loans to their members. Another 
commenter requested that the Board eliminate the aggregate limit for 
PALs loans entirely for any FCU that offers PALs loans to their 
members. The Board did not raise this issue in the PALs II NPRM. 
Accordingly, the Board does not believe it would be appropriate under 
the Administrative Procedure Act to consider these requests at this 
time. However, the Board will consider the commenters' suggestions and 
may revisit the aggregate limit for PALs loans in the future if 
appropriate.
    Other commenters to the PALs II NPRM asked for clarification 
regarding the underwriting criteria that an FCU must use in connection 
with a PALs loan. Specifically, commenters requested guidance on 
whether an FCU should consider a borrower's debt burden in addition to 
monthly income or deposit activity when making a PALs loan. The Board 
has not historically required specific underwriting standards for PALs 
loans. Rather, the Board has allowed an FCU to develop its own lending 
policies based on its risk tolerance.\33\ At a minimum, however, the 
Board has recommended that an FCU develop underwriting standards that 
``account for a member's need for quickly available funds, while 
adhering to principles of responsible lending.'' \34\ This includes 
examining a borrower's ``proof of employment or income, including at 
least two recent paycheck stubs'' to determine a borrower's repayment 
ability as well as ``developing standards for maturity lengths and loan 
amounts so a borrower can manage repayment of the loan.'' \35\
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    \33\ See Short-Term, Small Amount Loans, 75 FR 58285, 58288 
(Sept. 24, 2010).
    \34\ 12 CFR 701.21(c)(7)(iii)(B)(2).
    \35\ Id.
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    The Board continues to believe that an FCU is in the best position 
to develop its own underwriting standards based on its risk tolerance 
as long as those standards are consistent with responsible lending 
principles. While the Board has historically only provided guidance on 
minimum standards for determining a borrower's recurring income as the 
key criteria for eligibility for a PALs loan, that does not mean that 
an FCU may ignore a borrower's debt burden when determining whether to 
grant a PALs loan. Rather, the FCU must consider the borrower's entire 
financial position, including debt burden, and make an informed 
judgment consistent

[[Page 51947]]

with responsible lending principles regarding whether to extend a PALs 
loan to a borrower. Accordingly, the FCU should conduct some inquiry 
into whether the borrower can manage to repay the PALs loan without the 
need for additional PALs loans or traditional payday loans. When 
considering the application of a member with prior a history at the 
credit union, a review of credit and debit activity in their account 
may be sufficient to make this determination.

Section 701.21(c)(7)(iv)--Payday Alternative Loans (PALs II)

    The final rule creates a new provision, Sec.  701.21(c)(7)(iv), 
that sets forth the requirements for PALs II loans. In the PALs II 
NPRM, a majority of commenters asked that the Board combine the PALs I 
rule and proposed PALs II rule together in a single PALs regulation. 
Most of the commenters argued strongly that one PALs loan regulation 
would reduce confusion and provide FCUs with greater flexibility to 
structure their PAL programs in ways that best serve their members.
    A small number of commenters raised serious concerns regarding the 
applicability of the CFPB's payday lending rule \36\ should the Board 
adopt any changes to the PALs I rule. The CFPB's payday lending rule 
establishes consumer protections for certain high-cost credit products, 
including payday loans, and deems some credit practices related to 
those products to be unfair or abusive in violation of the Consumer 
Financial Practices Act.\37\ However, the CFPB's payday lending rule 
provides a ``safe harbor'' for any loan that is made by an FCU in 
compliance with the PALs I rule with an explicit cross-reference to 
Sec.  701.21(c)(7)(iii).\38\ These commenters argued that any changes 
to the PALs I rule may eliminate the safe harbor for FCUs in the CFPB's 
rule. To allow FCUs to continue to avail themselves of the safe harbor, 
the commenters requested that the Board adopt the PALs II rule as a 
separate provision within the NCUA's general lending rule.\39\
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    \36\ 12 CFR part 1041.
    \37\ See 12 CFR 1041.1(b) (purpose).
    \38\ 12 CFR 1041.3(e)(4).
    \39\ In addition, as noted in the NPRM, the CFPB's current 
payday lending rule conditionally exempts ``alternative loans,'' 
which covers loans that meet certain PALs I requirements. The Board 
notes that the CFPB's rule does not include the minimum membership 
period or limitation on the number of loans in a six-month period 
among the criteria for the exemption. The Board's decision to limit 
the number of loans that may be made in a six-month period does not 
affect this exemption because the CFPB's rule does not include the 
number of loans as a criterion for the exemption.
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    The CFPB has proposed amendments to certain aspects of its payday 
lending rule.\40\ Because the regulatory landscape with respect to 
payday lending remains somewhat uncertain until the Bureau completes 
the rulemaking process, the Board believes that adopting the PALs II 
rule as a separate provision within the NCUA's general lending rule is 
appropriate at this time to preserve the availability of the safe 
harbor for FCUs that offer PALs loans that conform to the requirements 
of the PALs I rule.
---------------------------------------------------------------------------

    \40\ Payday, Vehicle Title, and Certain High-Cost Installment 
Loans, 84 FR 4252 (Feb. 14, 2019).
---------------------------------------------------------------------------

Membership Requirement
    Current Sec.  701.21(c)(7)(iii)(A)(6) requires a borrower to be a 
member of an FCU for at least one month before the FCU can make a PALs 
I loan to that borrower.\41\ However, an FCU may establish a longer 
period as a matter of business judgment. The PALs II NPRM proposed to 
remove this minimum membership time requirement for PALs II loans. The 
purpose of this change was to allow an FCU to make a PAL II loan to any 
member borrower that needs access to funds immediately and would 
otherwise turn to a payday lender to meet that need.
---------------------------------------------------------------------------

    \41\ 12 CFR 701.21(c)(7)(iii)(A)(6).
---------------------------------------------------------------------------

    Many of the commenters that addressed this issue favored removing 
the minimum membership time requirement with respect to PALs II loans. 
These commenters argued that this change would provide an FCU with the 
flexibility necessary to serve member borrowers that need immediate 
access to temporary liquidity who might otherwise turn to a payday 
lender. In contrast, a few commenters argued against this change, 
noting that that a minimum membership requirement is a prudent lending 
practice that helps an FCU establish a meaningful relationship with a 
potential borrower before offering a PALs II loan to that borrower.
    The Board agrees that establishing a meaningful relationship with a 
potential borrower is a prudent lending practice and protects an FCU 
from certain risks. Accordingly, the Board encourages FCUs to consider 
establishing a minimum membership requirement as a matter of sound 
business judgment. However, the Board believes that granting PALs II 
loans to member borrowers, who need immediate access to funds, is a 
better alternative than having those borrowers take out predatory 
payday loans and wait for 30 days before rolling that predatory payday 
loan over into a PALs II loan, or worse, never applying for a PALs II 
loan. Therefore, the Board is adopting this aspect of the PALs II NPRM 
as proposed. The Board notes, however, that this final rule does not 
prohibit a credit union from setting a minimum membership term, but it 
is not required to do so.

Section 701.21(c)(7)(iv)(A)(1)

    The PALs I rule limits the principal amount of a PALs I loan to not 
less than $200 or more than $1,000.\42\ In contrast, the PALs II NPRM 
proposed to allow an FCU to offer a PALs II loan with a loan amount up 
to $2,000 without any minimum loan amount. The Board believes that a 
higher maximum and no minimum loan amount will allow an FCU to meet the 
demands of more segments of the payday loan market. Furthermore, the 
PALs II NPRM provided that a higher maximum loan amount will allow some 
borrowers to cover a larger financial emergency or to consolidate 
multiple payday loans into a PALs II loan, thereby providing a pathway 
to mainstream financial products and services offered by credit unions.
---------------------------------------------------------------------------

    \42\ 12 CFR 701.21(c)(7)(iii)(A)(1).
---------------------------------------------------------------------------

Maximum Loan Amount
    Many commenters argued against the $2,000 maximum loan amount as 
too low. These commenters argued that $2,000 is insufficient to cover 
most large financial emergencies that prompt a borrower to resort to a 
payday loan or to allow a borrower to consolidate all of the borrower's 
payday loans. Some of these commenters, however, also argued that a 
larger maximum loan amount would be more profitable and allow an FCU to 
make sufficient interest to cover the cost of this type of lending.
    In contrast, some commenters argued that allowing an FCU to charge 
a 28 percent APR for a $2,000 PALs II loan is a slippery slope to 
allowing an FCU to operate outside of the usury ceiling. These 
commenters noted that larger, longer-term loans provide increased 
revenue to the credit union and, therefore, the Board should not adopt 
a special exception from the general usury ceiling for these types of 
products.
    While the Board recognizes that $2,000 may be insufficient to cover 
a larger financial emergency or to allow a borrower to consolidate a 
considerable number of payday loans, it nevertheless believes that 
allowing an FCU to offer a $3,000 or $4,000 loan at 28 percent interest 
is too high a limit and would violate the spirit of the FCU Act. In 
adopting the PALs I rule, the Board reluctantly established a separate 
usury ceiling for PALs I loans after a careful determination than an 
FCU could not

[[Page 51948]]

provide a reasonable alternative to a payday loan under the general 
usury ceiling. By allowing an FCU to charge a higher interest rate, the 
Board sought to create a regulatory structure that allowed an FCU to 
offer a responsible payday loan alternative to members in a prudent 
manner.
    The Board believes that $2,000 is a reasonable limit for the vast 
majority of PALs II loan borrowers. Accordingly, the Board is also 
adopting this aspect of the PALs II NPRM as proposed.
Minimum Loan Amount
    Several commenters expressed support for removing the minimum loan 
amount as a means of allowing an FCU to tailor its PALs II program to 
the unique needs of its members. In contrast, other commenters argued 
that removing the minimum loan amount would result in a triple digit 
APR comparable to a traditional payday loan for any PALs II loan under 
$100 where the credit union also charges an application fee.
    The Board believes that an FCU should have the flexibility to meet 
borrower demand to avoid the need for those borrowers to resort to a 
traditional payday loan. While the total cost of credit may be high for 
these loans, the PALs II rule provides significant structural 
safeguards not present in most traditional payday loans.
    Furthermore, the Board does not believe it is prudent for an FCU to 
require a member to borrow more than necessary to meet the borrower's 
demand for funds. Establishing a minimum PALs II loan amount would 
require a borrower to carry a larger balance and incur additional 
interest charges to avoid an apparently high APR when a smaller PALs II 
loan would satisfy that borrower's need for funds without the 
additional interest charges. On balance, the Board believes that the 
borrower's real need to avoid additional charges outweighs the need to 
avoid the appearance of a higher APR for smaller PALs II loans. 
Accordingly, the Board is adopting this aspect of the PALs II NPRM as 
proposed.
    Nevertheless, the Board is mindful that allowing an FCU to charge 
an application fee up to $20 in connection with a PALs II loan less 
than $100 is problematic. Depending on the facts and circumstances, the 
Board believes that charging a $20 application fee for a low amount 
financed may take unfair advantage of the inability of the borrower to 
protect his or her interests, especially where minimal underwriting is 
expected to be performed. The Board reminds commenters that the 
application fee is to recoup the actual costs associated with 
processing an application. And more importantly, the $20 maximum amount 
allowed under this rule is the ceiling, not the floor. Any application 
fee charged by an FCU should be commensurate with the level of 
underwriting necessary to process a PALs II loan. Accordingly, the NCUA 
Board will instruct examiners to thoughtfully scrutinize the 
application fee charged for a PALs II loan less than $200.

Section 701.21(c)(7)(iv)(A)(2)

    The PALs I rule currently limits loan maturities to a minimum of 
one month and a maximum of 6 months.\43\ The PALs II NPRM proposed to 
allow an FCU to make a PALs II loan with a minimum maturity of one 
month and a maximum maturity of 12 months. The PALs II NPRM provided 
that the longer loan term will allow an FCU making a larger PALs II 
loan to establish a repayment schedule that is affordable for the 
borrower while still fully amortizing the loan.
---------------------------------------------------------------------------

    \43\ 12 CFR 701.21(c)(7)(iii)(A)(2).
---------------------------------------------------------------------------

    All of the commenters that addressed this issue favored a maximum 
loan term of at least one year. A few commenters believed that a 
maximum loan term of one year is too short, allowing borrowers 
insufficient time to pay off larger PALs II loans. These commenters 
favored a more flexible maximum loan term to allow an FCU to establish 
a repayment schedule that is appropriate for the unique needs of each 
individual borrower. Other commenters advocated for the removal of any 
maximum maturity limit to allow an FCU the greatest amount of 
flexibility to establish an affordable repayment schedule. A few 
commenters also suggested that the Board increase the minimum loan term 
to 90 days to make PALs II loans safer for borrowers.
    Each group of commenters made a reasonable argument why the Board 
should adopt a flexible maximum loan term. After considering these 
varied viewpoints, the Board has determined to finalize this aspect of 
the PALs II NPRM as proposed. Should the Board engage in any future 
rulemaking regarding PALs loans, it will further consider the 
commenters' suggestions along with any applicable data gathered on PALs 
II loans.

Section 701.21(c)(7)(iv)(A)(3)

    The PALs I rule currently prohibits an FCU from making more than 
three PALs I loans in a rolling 6-month period to a single 
borrower.\44\ The PALs II NPRM proposed to remove that restriction for 
PALs II loans. However, an FCU would not be allowed not make more than 
one of any type of PALs loan, whether a PALs I or PALs II loan, to a 
single borrower at a time.
---------------------------------------------------------------------------

    \44\ 12 CFR 701.21(c)(7)(iii)(A)(3).
---------------------------------------------------------------------------

    Many of the commenters that addressed this issue favored removing 
the limit on the number of PALs II loans that an FCU may make to a 
borrower over 6 months as long as the Board retained the restriction of 
making no more than one PALs loan to a single borrower at a time. These 
commenters argued that this would provide FCUs with added flexibility 
to meet the needs of their members, particularly those members that 
currently use payday loans as a source of temporary liquidity. Other 
commenters also favored removing the limit, but opposed retaining the 
limit of one loan per borrower at a time.
    Some commenters opposed removal of the limit on the number of PALs 
II loans an FCU can make to a borrower in a 6-month period. These 
commenters argued that such a change would allow an FCU to churn loans 
each month, charging an application fee for each PALs loan, with little 
economic benefit to the borrower similar to a predatory payday loan. 
According to these commenters, this would create a strong incentive for 
FCUs to adopt a business model that maximizes application fee revenue 
at the expense of the borrower contrary to the purposes of PALs loans.
    The Board has reconsidered this aspect of the proposed rule and 
agrees that removing the limit on the number of PALs II loans an FCU 
may make to a single borrower at a time may encourage some FCUs to 
adopt a business model that maximizes fee revenue at the expense of the 
borrower. The Board fashioned the structural safeguards in the PALs I 
rule to eliminate the business practices common in the predatory payday 
lending industry that trap borrowers in cycles of repeated borrowings. 
Accordingly, the Board is not adopting this aspect of the PALs II NPRM 
in the final rule.

Section 701.21(c)(7)(iv)(A)(8)

    The final rule adds a new Sec.  701.21(c)(7)(iii)(A)(8) prohibiting 
an FCU from charging an overdraft or NSF fee in connection with a PALs 
II loan payment drawn against a borrower's account.\45\ In the PALs II 
NPRM, the Board asked whether the NCUA should prohibit overdraft or NSF 
fees charged

[[Page 51949]]

in connection with any PALs loan payments. Half of the commenters that 
responded to this question answered in the affirmative, arguing that an 
FCU could use overdraft fees in a predatory manner to extract 
additional revenue from a PALs loan borrower. These commenters also 
felt that allowing overdraft fees related to a PALs loan is contrary to 
providing borrowers with a meaningful pathway towards mainstream 
financial products and services because additional fees can have a 
devastating impact on the borrower's financial health and leave the 
borrower trapped in a ``cycle of debt.''
---------------------------------------------------------------------------

    \45\ This includes extended overdraft fees or NSF fees that the 
FCU would assess against the borrower for paying items presented for 
payment after the PAL payment creates a negative balance in the 
borrower's account.
---------------------------------------------------------------------------

    The remainder of the commenters that responded to this question 
opposed prohibiting an FCU from charging overdraft fees related to PALs 
loans. These commenters argued that the decision to extend an overdraft 
loan and charge overdraft fees should be business decisions for each 
individual FCU and that the Board should not treat overdraft or NSF 
fees charged in connection with a PALs loan payment any differently 
from other circumstance when a borrower overdraws an account to make a 
loan payment. Finally, some cautioned that prohibiting overdraft or NSF 
fees could pose a safety and soundness risk to an FCU if a borrower 
routinely overdraws an account because of a PALs loan.
    The Board agrees that the decision to extend an overdraft loan to a 
borrower is a business decision for each FCU to make in accordance with 
its own risk tolerance. Generally, the Board also believes that an FCU 
charging a reasonable and proportional overdraft fee in connection with 
an overdraft loan is appropriate in most cases to compensate the credit 
union for providing an important source of temporary liquidity to 
borrowers. However, the Board has serious fairness \46\ concerns 
regarding the potential harm to borrowers caused by allowing an FCU to 
charge overdraft or NSF fees in connection with a PALs II loan payment 
given the increased principal amount allowed for PALs II loans.
---------------------------------------------------------------------------

    \46\ A business practice is unfair if it is likely to cause 
substantial consumer harm that is not reasonably avoidable by the 
consumer and not otherwise outweighed by any countervailing benefits 
to consumers or competition. See 15 U.S.C. 45(n).
---------------------------------------------------------------------------

    Charging overdraft fees related to a PALs II loan payment is likely 
to cause substantial borrower harm.\47\ The Board envisions PALs II 
loan borrowers typically will be in a vulnerable financial position and 
unable to take on additional expenses. Charging an overdraft fee in 
this situation will likely weaken the borrower's financial position 
further and can have cascading consequences including an inability to 
repay the PALs II loan. Moreover, charging an overdraft fee in addition 
to requiring repayment of the overdrawn balance makes the borrower even 
less likely to meet other expenses or obligations.
---------------------------------------------------------------------------

    \47\ A harm may be ``substantial'' if ``a relatively small harm 
is inflicted on a large number of consumers or if a greater harm is 
inflicted on a relatively small number of consumers . . . [i]n most 
cases, substantial injury would involve monetary or economic harm or 
unwarranted health and safety risks.'' See Sen. Rep. No. 130, 103d 
Cong. 2d Sess. 12 (1994), reprinted in 1994 U.S.C.C.A.N. 1787-1788.
---------------------------------------------------------------------------

    This type of harm is also not reasonably avoidable by the 
borrower.\48\ A borrower cannot reasonably avoid injury that results 
from an unpredictable event.\49\ The decision whether to extend an 
overdraft loan and charge an overdraft fee, rests entirely with the FCU 
and not with the borrower. Accordingly, the borrower does not have an 
ability to anticipate which items that could overdraw the account that 
the FCU will honor and take appropriate action to minimize the 
potential for overdraft fees. Even if the borrower, in the abstract, 
should have the ability to anticipate such an event, behavioral 
economics research shows that borrowers are prone to hyperbolic 
discounting of the risk of potential negative events, making such an 
ability to anticipate the overdraft more theoretical than actual.\50\
---------------------------------------------------------------------------

    \48\ ``A harm is `reasonably avoidable' if consumers `have 
reason to anticipate the impending harm and the means to avoid it,' 
or if consumers are aware of, and are reasonably capable of 
pursuing, potential avenues toward mitigating the injury after the 
fact.'' Davis v. HSBC Bank Nev., N.A., 691 F.3d 1152, 1168-69 (9th 
Cir. 2012) (citing Orkin Exterminating Co. v. FTC, 849 F.2d 1354, 
1365-66 (11th Cir. 1988)). Thus, ``[i]n determining whether 
consumers' injuries were reasonably avoidable, courts look to 
whether the consumers had a free and informed choice.'' FTC v. 
Neovi, Inc., 604 F.3d 1150, 1158 (9th Cir. 2010).
    \49\ Trade Regulation Rule; Credit Practices, 49 FR 7740, 7747 
(Mar 1. 1984).
    \50\ See e.g., Debra Pogrund Stark & Jessica M. Choplin, A 
License to Deceive: Enforcing Contractual Myths Despite Consumer 
Psychological Realities, 5 N.Y.U. J. L. & Bus. 617, 659-660 (2009).
---------------------------------------------------------------------------

    Moreover, a borrower cannot reasonably avoid injury that results 
from an involuntary event.\51\ The Federal Trade Commission (FTC) has 
compiled an extensive factual record showing that ``the precipitating 
cause of default is usually a circumstance or event beyond the debtor's 
immediate control.'' \52\ Accordingly, ``among those defaults that do 
occur, the majority are not reasonably avoidable by consumers. Instead, 
default is a response to events that are largely beyond the consumer's 
control.'' \53\ Although some precaution ``can reduce the risk of 
default . . . no reasonable level of precautions can eliminate the 
risk. Moreover, some consumers are unable to take various precautionary 
steps.'' \54\ While an overdraft loan prevents a borrower from 
defaulting, many of the same circumstances that would cause a borrower 
to default would also cause a borrower to overdraw an account. 
Furthermore, in the case of PALs II loan borrowers, the member borrower 
may have limited ability to take precautionary steps to limit the harm 
caused by overdrafts given the borrower's financial position.
---------------------------------------------------------------------------

    \51\ Trade Regulation Rule; Credit Practices, 49 FR 7740, 7747-8 
(Mar 1. 1984).
    \52\ Id.
    \53\ Id.
    \54\ Id.
---------------------------------------------------------------------------

    Allowing an FCU to charge overdraft fees related to a PALs II loan 
payment offers an insubstantial benefit to borrowers or competition in 
the payday lending marketplace when measured against the potential for 
substantial borrower harm.\55\ The Board recognizes that allowing 
overdraft or NSF fees will make an FCU more likely to extend an 
overdraft loan to provide temporary liquidity for a PALs II loan 
borrower. However, the tradeoff for that liquidity is the potential for 
additional overdraft fees that could cause the borrower to experience 
other negative consequences such as the loss of a vehicle or eviction 
while trying to pay off overdraft fees. Moreover, while the Board 
acknowledges that this provision could result in borrowers receiving 
less overdraft loans or FCUs receiving less fee income, the Board 
believes that overdraft loans related to PALs II loans leave the 
borrower less financially stable and that FCUs already receive 
sufficient income through application fees and higher APRs charged on 
PALs II loan balances. Accordingly, the Board believes, on balance, 
that potential borrower harm outweighs potential tangible benefits.
---------------------------------------------------------------------------

    \55\ In assessing whether a business practice is ``not 
outweighed by countervailing benefits to consumers or to 
competition,'' one is not required to ``quantify the detrimental and 
beneficial effects of the practice in every case . . . [i]n many 
instances, such a numerical benefit-cost analysis would be 
unnecessary; in other cases, it may be impossible.'' Rather, one 
must ``carefully evaluable the benefits and costs . . .considering 
reasonably available evidence.'' See Sen. Rep. No. 130, 103d Cong. 
2d Sess. 12 (1994), reprinted in 1994 U.S.C.C.A.N. 1787-1788. If the 
net effect of a particular business practice is injurious to 
consumers, then the practice is unfair. See Am. Fin. Svcs Ass'n v. 
FTC, 767 F.2d 957 (D.C. Cir. 1985).
---------------------------------------------------------------------------

    Finally, the Board believes that allowing overdraft fees related to 
a PALs

[[Page 51950]]

II loan payment is contrary to one of the goals of PALs loans,\56\ 
which is to provide borrowers with meaningful pathways towards 
mainstream financial products and services offered by credit unions. 
Accordingly, the Board is adopting a provision in the final rule to 
prohibit an FCU from charging an overdraft or NSF fee in connection 
with a PALs II loan payment drawn against a borrower's account. It may 
consider imposing similar requirement on all PALs loans in a future 
rulemaking should the Board determine that such a restriction is 
necessary for all PALs loans.
---------------------------------------------------------------------------

    \56\ When determining whether a business practice is fair, one 
may consider established public policy as evidence to be considered 
with all over evidence. However, public policy may not serve as the 
primary basis for determining the fairness of a business practice. 
See 15 U.S.C. 45(n). At least some older cases have found excessive 
bank fees to be unconscionable. See Perdue v. Crocker Nat'l Bank, 
702 P.2d 503 (Cal. 1985).
---------------------------------------------------------------------------

    The Board recognizes that certain automated internal processes may 
cause an FCU to violate this prohibition on charging an overdraft or 
NSF fee in connection with a PALs II loan payment inadvertently. The 
Board notes that any FCU that charges an overdraft or NSF fee in 
connection with a PALs II loan payment should immediately refund the 
charge to the borrower. If the FCU refunds the charge to the borrower, 
the Board will not consider the FCU to have violated this aspect of the 
PALs II rule.

VI. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires the NCUA to prepare an 
analysis to describe any significant economic impact a regulation may 
have on a substantial number of small entities (primarily those under 
$100 million in assets).\57\ This rule will provide a limited number of 
FCUs making PALs with additional flexibility to make such loans. 
Accordingly, the Board believes that the rule will not have a 
significant economic impact on a substantial number of small credit 
unions. Therefore, a regulatory flexibility analysis is not required.
---------------------------------------------------------------------------

    \57\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) (SBREFA) provides generally for congressional review 
of agency rules. The NCUA triggers a SBREFA reporting requirement when 
the agency issues a final rule as defined by section 551 of the 
Administrative Procedure Act. As required by SBREFA, the NCUA submitted 
this final rule to the Office of Management and Budget (OMB) for it to 
determine if the final rule is a ``major rule'' for purposes of SBREFA. 
The OMB determined that the rule is not major. The NCUA also will file 
appropriate reports with Congress and the Government Accountability 
Office so this rule may be reviewed.

Paperwork Reduction Act

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3501, et seq.) (PRA), the NCUA may not conduct or 
sponsor, and the respondent is not required to respond to, an 
information collection unless it displays a currently valid OMB control 
number. For purposes of the PRA, an information collection may take the 
form of a reporting, recordkeeping, or a third-party disclosure 
requirement, referred to as a paperwork burden. The information 
collection requirements of Sec.  701.21 of NCUA's regulations are 
assigned OMB control number 3133-0092 and this rule would not impose 
any new paperwork burden.

Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this final rule will not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999.\58\
---------------------------------------------------------------------------

    \58\ Public Law 105-277, section 654, 112 Stat. 2681, 2681-581 
(1998).
---------------------------------------------------------------------------

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests.\59\ 
The NCUA, an independent regulatory agency, as defined in 44 U.S.C. 
3502(5), voluntarily complies with the executive order to adhere to 
fundamental federalism principles. The final rule will not have 
substantial direct effects on the states, on the relationship between 
the national government and the states, or on the distribution of power 
and responsibilities among the various levels of government. The NCUA 
has therefore determined that this final rule does not constitute a 
policy that has federalism implications for purposes of the executive 
order.
---------------------------------------------------------------------------

    \59\ 64 FR 43255 (Aug. 4, 1999).
---------------------------------------------------------------------------

List of Subjects in 12 CFR Part 701

    Credit unions, Federal credit unions.

    By the National Credit Union Administration Board on September 
19, 2019.
Gerard S. Poliquin,
Secretary of the Board.
    For the reasons stated above, the National Credit Union 
Administration amends 12 CFR part 701 as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

0
1. The authority for part 701 continues to read as follows:

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1758, 1759, 
1761a, 1761b, 1766, 1767, 1782, 1784, 1786, 1787, 1789. Section 
701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 is also 
authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610. 
Section 701.35 is also authorized by 42 U.S.C. 4311-4312.


0
2. Amend Sec.  701.21 by revising paragraph (c)(7)(iii) and adding 
paragraph (c)(7)(iv) to read as follows:


Sec.  701.21  Loans to members and lines of credit to members.

* * * * *
    (c) * * *
    (7) * * *
    (iii) Payday alternative loans (PALs I)--(A) Minimum requirements 
for PALs I. Notwithstanding any other provision of this section, a 
federal credit union may charge an interest rate that is 1000 basis 
points above the maximum interest rate established by the Board under 
paragraph (c)(7)(ii) of this section provided the federal credit union 
is offering closed-end credit, as defined in Sec.  1026.2(a)(10) of 
this title, in accordance with the following conditions:
    (1) The principal of the payday alternative loan is not less than 
$200 or more than $1,000;
    (2) The payday alternative loan has a minimum maturity of one month 
and a maximum maturity of six months;
    (3) The federal credit union does not make more than three payday 
alternative loans provided under either this paragraph (c)(7)(iii) or 
paragraph (c)(7)(iv) of this section in any rolling six-month period to 
any one borrower and does not make more than one payday alternative 
loan provided under either this paragraph (c)(7)(iii) or paragraph 
(c)(7)(iv) of this section at a time to any borrower;
    (4) The federal credit union does not rollover any payday 
alternative loan provided under this paragraph (c)(7)(iii) or paragraph 
(c)(7)(iv) of this section, provided that the prohibition against 
rollovers does not apply to an extension of a payday alternative loan 
term within

[[Page 51951]]

the maximum loan term set forth in paragraph (c)(7)(iii)(A)(3) of this 
section that does not include any additional fees assessed or extend 
additional credit to the borrower;
    (5) The federal credit union fully amortizes the payday alternative 
loan;
    (6) The federal credit union requires the borrower to be a member 
of the credit union for at least one month before receiving a payday 
alternative loan provided under this paragraph (c)(7)(iii);
    (7) The federal credit union charges a reasonable application fee 
to all members applying for a new payday alternative loan offered under 
this paragraph (c)(7)(iii) that reflects the actual costs associated 
with processing the application, but that in no case exceeds $20; and
    (8) The federal credit union includes, in its written lending 
policies, a limit on the aggregate dollar amount of payday alternative 
loans made under this paragraph (c)(7)(iii) and paragraph (c)(7)(iv) of 
this section that does not exceed an aggregate of 20% of net worth and 
implements appropriate underwriting guidelines to minimize risk, such 
as, requiring a borrower to verify employment by providing at least two 
recent pay stubs.
    (B) PALs I guidance and best practices. In developing a successful 
payday alternative loan program, a federal credit union should consider 
how the program would benefit a member's financial well-being while 
considering the higher degree of risk associated with this type of 
lending. The guidance and best practices are intended to help federal 
credit unions minimize risk and develop a successful program, but are 
not an exhaustive checklist and do not guarantee a successful program 
with a low degree of risk.
    (1) Program features. Several features that may increase the 
success of a payday alternative loan program and enhance member benefit 
include adding a savings component, financial education, reporting of 
members' payment of payday alternative loans to credit bureaus, or 
electronic loan transactions as part of a payday alternative loan 
program. In addition, although a federal credit union cannot require 
members to authorize a payroll deduction, a federal credit union should 
encourage or incentivize members to utilize payroll deduction.
    (2) Underwriting. Federal credit unions should develop minimum 
underwriting standards that account for a member's need for quickly 
available funds, while adhering to principles of responsible lending. 
Underwriting standards should address required documentation for proof 
of employment or income, including at least two recent paycheck stubs. 
Federal credit unions should be able to use a borrower's proof of 
recurring income as the key criterion in developing standards for 
maturity lengths and loan amounts so a borrower can manage repayment of 
the loan. For members with established accounts, federal credit unions 
should only need to review a member's account records and proof of 
recurring income or employment.
    (3) Risk avoidance. Federal credit unions should consider risk 
avoidance strategies, including requiring members to participate in 
direct deposit and conducting a thorough evaluation of the federal 
credit union's resources and ability to engage in a payday alternative 
loan program.
    (iv) Payday alternative loans (PALs II)--(A) Minimum requirements 
for PALs II. Notwithstanding any other provision of this section, a 
federal credit union may charge an interest rate that is 1000 basis 
points above the maximum interest rate established by the Board under 
paragraph (c)(7)(ii) of this section provided the federal credit union 
is offering closed-end credit, as defined in Sec.  1026.2(a)(10) of 
this title, in accordance with the following conditions:
    (1) The principal of the payday alternative loan is not more than 
$2,000;
    (2) The payday alternative loan has a minimum maturity of one month 
and a maximum maturity of 12 months;
    (3) The federal credit union does not make more than three payday 
alternative loans provided either under paragraph (c)(7)(iii) of this 
section or this paragraph (c)(7)(iv) in any rolling six-month period to 
any one borrower and does not make more than one payday alternative 
loan provided under either paragraph (c)(7)(iii) of this section or 
this paragraph (c)(7)(iv) at a time to any borrower;
    (4) The federal credit union does not rollover any payday 
alternative loan provided under paragraph (c)(7)(iii) of this section 
or this paragraph (c)(7)(iv), provided that the prohibition against 
rollovers does not apply to an extension of a payday alternative loan 
term within the maximum loan term set forth in paragraph 
(c)(7)(iv)(A)(3) of this section that does not include any additional 
fees assessed or extend additional credit to the borrower;
    (5) The federal credit union fully amortizes the payday alternative 
loan;
    (6) The federal credit union charges a reasonable application fee 
to all members applying for a new payday alternative loan offered under 
this paragraph (c)(7)(iv) that reflects the actual costs associated 
with processing the application, but that in no case exceeds $20;
    (7) The federal credit union does not assess a fee or charge, 
including a non-sufficient funds fee, on the borrower's account 
pursuant to the federal credit union's overdraft service, as defined in 
Sec.  1005.17(a) of this title, in connection with any payday 
alternative loan provided under this paragraph (c)(7)(iv); and
    (8) The federal credit union includes, in its written lending 
policies, a limit on the aggregate dollar amount of payday alternative 
loans made under paragraph (c)(7)(iii) of this section and this 
paragraph (c)(7)(iv) that does not exceed an aggregate of 20% of net 
worth and implements appropriate underwriting guidelines to minimize 
risk, such as, requiring a borrower to verify employment by providing 
at least two recent pay stubs.
    (B) PALs II guidance and best practices. In developing a successful 
payday alternative loan program, a federal credit union should consider 
how the program would benefit a member's financial well-being while 
considering the higher degree of risk associated with this type of 
lending. The guidance and best practices are intended to help federal 
credit unions minimize risk and develop a successful program, but are 
not an exhaustive checklist and do not guarantee a successful program 
with a low degree of risk.
    (1) Program features. Several features that may increase the 
success of a payday alternative loan program and enhance member benefit 
include adding a savings component, financial education, reporting of 
members' payment of payday alternative loans to credit bureaus, or 
electronic loan transactions as part of a payday alternative loan 
program. In addition, although a federal credit union cannot require 
members to authorize a payroll deduction, a federal credit union should 
encourage or incentivize members to utilize payroll deduction.
    (2) Underwriting. Federal credit unions should develop minimum 
underwriting standards that account for a member's need for quickly 
available funds, while adhering to principles of responsible lending. 
Underwriting standards should address required documentation for proof 
of employment or income, including at least two recent paycheck stubs. 
Federal credit unions should be able to use a borrower's proof of 
recurring income as the key criterion in developing standards for 
maturity lengths and loan amounts so a borrower

[[Page 51952]]

can manage repayment of the loan. For members with established 
accounts, federal credit unions should only need to review a member's 
account records and proof of recurring income or employment.
    (3) Risk avoidance. Federal credit unions should consider risk 
avoidance strategies, including requiring members to participate in 
direct deposit and conducting a thorough evaluation of the federal 
credit union's resources and ability to engage in a payday alternative 
loan program.
* * * * *

[FR Doc. 2019-20821 Filed 9-30-19; 8:45 am]
BILLING CODE 7535-01-P