Press
Matz: Proposed payday rules could limit credit union lending to military members
NCUA Chairman speaks on regulatory issues to Defense Credit Union Council
ALEXANDRIA, VA (May 5, 2015) – Regulatory proposals to change payday lending rules could prevent credit unions from making affordable payday alternative loans, NCUA Board Chairman Debbie Matz said today.
“Proposals from two federal agencies could require credit unions to make major changes in their loan programs,” Matz said. “NCUA supports the intent of proposals from the Defense Department and the Consumer Financial Protection Bureau to protect consumers from predatory lending, but we are working to ensure those rules avoid unintended consequences of outlawing access to affordable credit union loans.”
Matz also warned credit unions about rising interest rates. “Just as soldiers plan ahead for coming battles, credit unions must prepare for a changing interest rate environment.”
Matz spoke on these and other regulatory issues to the Defense Credit Union Council’s Overseas Subcouncil in Dublin, Ireland. More than 200 credit unions with over 18 million members in all military branches belong to the Defense Council. The full text is available online here.
Proposed Rules Would Fight Predatory Lending
The Defense Department is proposing a “military APR” limit of 36 percent on payday loans and other short-term lending products. Unlike the annual percentage rate charged to civilians, the military APR would include fees, which are normally exempt under Truth in Lending Act rules.
“We have done the math and found that when fees are included, many credit unions’ short-term loans would exceed the proposed 36-percent military APR limit,” Matz said. “Unfortunately, this proposed rule would deny access to affordable alternatives to predatory payday loans.”
In 2010, NCUA established a regulatory framework for payday alternative loans. These loans allow federal credit unions to charge an APR up to 28 percent and an application fee of no more than $20 to cover the processing cost. Today, more than 500 federal credit unions offer payday alternative loans, including several military-related credit unions.
The average payday alternative loan balance is $630 with a median interest rate of 24.6 percent. And the average total cost for a 30-day payday alternative loan is $33. However, the Defense Department’s proposed rule would ban such loans for military members and their families.
“We are asking the Defense Department to modify its proposal to prevent the unintended consequence of outlawing affordable credit union loans to the very servicemembers NCUA’s rule was intended to protect,” Matz said.
In December, Matz wrote to the Defense Department. The letter asked the department to exempt NCUA’s payday alternative loans from the final military APR rule.
Another proposal that could limit predatory lending is being considered by the Consumer Financial Protection Bureau. CFPB’s advance notice of proposed rulemaking would apply “Ability-to-Repay” underwriting requirements for certain loans in addition to mortgages. CFPB, however, is considering an exception for loans that satisfy NCUA’s payday alternative loan regulation, if the lender verifies the consumer’s income and the new loan does not result in the consumer having more than two covered longer-term loans from any lender during a six-month period.
Matz said NCUA continues to work with CFPB and the Defense Department to resolve the agency’s concerns and avoid unintended consequences. “We are making every effort with these agencies to promote your credit unions’ ability to provide needed services to military members,” Matz said. “I encourage all of you to do the same.”
Interest Rate Risk on NCUA’s Radar
Matz highlighted other issues on NCUA’s radar, including guarding against cybersecurity threats, addressing capital outliers, providing regulatory relief and preparing for coming changes in interest rates.
“Interest rate risk isn’t just a concern for NCUA; it’s a concern for all financial institutions’ regulators,” Matz said. “Interest rate risk is now higher than it was before the crisis. While most credit unions managed through interest rate hikes in the past, not every credit union is as well positioned today.”
Net long-term assets have risen from 25 percent of assets 10 years ago to 35 percent of assets today. Credit unions also have less flexibility to adjust to rising rates. For example, prior to the last rate cycle, before interest rates rose, only 15 percent of credit unions’ investments were longer than three years. Today, 46 percent of credit union investments exceed three years.
The Federal Reserve’s Federal Open Market Committee forecast anticipates that by 2017, the Fed Funds rate will rise by 300 basis points. Matz said NCUA examiners are therefore urging credit unions to shock their balance sheets with interest rate hike assumptions up to 300 basis points and to plan well ahead for that contingency.
NCUA is the independent federal agency created by the U.S. Congress to regulate, charter and supervise federal credit unions. With the backing of the full faith and credit of the United States, NCUA operates and manages the National Credit Union Share Insurance Fund, insuring the deposits of more than 99 million account holders in all federal credit unions and the overwhelming majority of state-chartered credit unions. At MyCreditUnion.gov and Pocket Cents, NCUA also educates the public on consumer protection and financial literacy issues.