Loan Zone: Payday lending rules in two countries

U.S. and Canadian credit unions face regulatory challenges.

Credit unions in North America have a duty to promote financial health through services that focus on helping improve members’ spending, saving, borrowing and planning habits. One piece of that puzzle is the small-dollar, short-term loan, which fills a critical niche in assuring access to money for millions of borrowers.

Many consumers in both the United States and Canada rely on these financial products. However, each of these countries has its own regulatory landscape, which poses differing obstacles for credit unions in developing and offering loans to help members with their short-term borrowing needs.

In the United States, the Consumer Financial Protection Bureau has encouraged credit unions to offer members an alternative to payday loans. At the same time, the bureau’s new, overly prescriptive proposed regulations may stifle innovation and impose onerous restrictions on lenders, particularly in meeting expectations for confirming a borrowers’ ability to repay. The proposed “full-payment test” is one of the most controversial elements in the CFPB’s planned requirements. Placing too much importance on confirming a member’s ability to repay by requiring prescriptive, specific methods, such as credit checks and human intervention, is likely to make these loans too costly for many credit unions to offer.

Many members, even higher-income households earning between $100,000 and $150,000 annually, are unable to produce $2,000 within 30 days for an unexpected expense, according to a recent study. This makes these types of loans a valuable service for members across the spectrum of income and credit standing. By permitting credit unions to use automated technology that analyzes members’ transaction history to determine their ability and willingness to repay, CFPB could ensure that consumers have access to much-needed small-dollar loans.

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