Proposed Defense Department Lending rule could affect credit unions, members

NCUA Supports Protecting Members of the Military from Predatory Lending

ALEXANDRIA, VA (September 26, 2014) — Credit unions serving members of the military or their families could be affected by a proposed Defense Department rule that may reduce their ability to offer certain kinds of credit, including payday alternative loans, the National Credit Union Administration said today.

“NCUA strongly supports protecting all consumers from predatory lending while ensuring they have access to affordable credit,” NCUA Board Chairman Debbie Matz said. “Four years ago, NCUA issued a rule allowing federal credit unions to offer consumer-friendly payday alternative loans. Consumer protections included specific limits on interest rates and fees, the amount borrowed, the number of loans and the term of the loan. Our goal has always been to enable credit unions to offer affordable credit to their members.

“Before finalizing NCUA’s payday lending alternative rule, we specifically considered how NCUA’s rule would fit with existing Defense Department regulations and determined that they were in sync.” Matz said. “However, the Defense Department’s new proposed rule would broaden the definition of ‘consumer credit’ under Military Lending Act regulations in a way that would prevent federal credit unions from making payday alternative loans permitted by our rule.”

NCUA has pledged to work with the Defense Department to reach the goal of protecting members of the military without limiting the affordable financial services credit unions can offer.

Current NCUA regulations allow federal credit unions to offer payday alternative loans with an interest rate of up to 28 percent and an application fee of up to $20. Under the Military Lending Act regulations, consumer credit to covered borrowers is subject to a 36 percent cap on the military annual percentage rate, or military APR, which includes application fees. If these regulations are revised to cover payday alternative loans, the rate and fee for many payday alternative loans would be higher than the military APR cap.

About 500 federal credit unions offer payday alternative loans. System-wide, these federal credit unions have about $23 million in outstanding loans, with an average loan balance of $382. These loans can include a savings component and access to financial literacy programs.

The Defense Department’s proposed rule would cover other types of consumer credit as well, including credit card accounts and overdraft lines of credit with a finance charge. As with payday alternative loans, the combined interest rates and fees for these products could exceed the 36 percent military APR cap, even if the interest rate is below the general 18 percent interest rate cap for federal credit unions.

The proposed rule is available online here. Comments must be received by the Defense Department within 60 days of publication in the Federal Register.

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 98 million account holders in all federal credit unions and the overwhelming majority of state-chartered credit unions. At andPocket Cents, NCUA also educates the public on consumer protection and financial literacy issues.

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