WASHINGTON–CUNA has told the CFPB it wants a complete exemption for all credit unions from an expansion of the agency’s lending rule, which is set to go into effect later this year. In February, the CFPB had proposed delaying by 15 months enforcement of a significant piece of its rule on small-dollar, short-term loans, particularly requirements that a lender determine whether borrowers will be able to repay the loans. It has also proposed rescinding other mandatory underwriting provisions.
The CUNA recommendation to the CFPB is broader than demands made in an earlier letter to the CFPB by NAFCU, which wants an exemption only for credit unions participating in NCUA’s PALs program. That program is available to federal charters only, however, and CUNA said during a call with the media the new CFPB rules will also affect state-chartered CUs that have assembled programs of their own in compliance with their respective state laws.
Both trade associations have said they oppose the requirement to prove ability to repay, a position that puts credit unions at odds with some long-time allies, a coalition of consumer groups that recently issued a statement opposing any rollback ofpayday loan protections. “High cost payday loans and car title loans trap consumers in cycles of debt,” the consumer groups said. “The CFPB has proposed to do away with the core requirement of its 2017 rule that requires lenders to determine a borrower’s ability to repay. The proposed rollbacks would prevent protections against debt traps from taking effect later this year.”
But CUNA cautioned the CFPB that if the 2017 Payday Rule is permitted take effect unamended, “there would be substantial disruption in the availability of small dollar credit from local credit unions. In fact, this has already begun to occur.”
In the lengthy CUNA comment letter on what are formally known as payday, vehicle title, and certain high-cost installment loans, signed by Alexander Monterrubio, senior director of advocacy and counsel, CUNA repeats a position both it and NAFCU have long extolled, that the “Bureau has clear legal authority under Section 1022 of the Dodd-Frank Wall Street Reform and Consumer Protection Act to entirely exempt small dollar loan products offered by credit unions.”
Should the CFPB decide against exempting credit union loan programs, then CUNA said it supports the proposed rescission of the 2017 Payday Rule’s mandatory underwriting requirements as an alternative.
Desjardins and Filene Cited
CUNA argued in its comment letter that credit unions were established, in part, to provide small-dollar credit on safe and affordable terms, and while acknowledging there have been abuses in the market, CUs have not been the source but instead an antidote. CUNA’s letter goes as far as to cite credit union pioneers Alphonse Desjardins and Edward Filene as well as the 1934 Federal Credit Union Act for evidence of the reason credit unions exist and the role they play.
“For the reasons outlined in our letter, the 2017 Payday Rule is inappropriate as applied to credit unions based on our structure, history, and pro-consumer offerings,” the letter states. “The case is clear how credit unions deserve different treatment than online, payday, and title lenders.”
“Unfortunately, the overly-broad 2017 Payday Rule does not strike an appropriate balance between enhancing consumer protection while still ensuring credit unions are able to continue serving their members,” the CUNA letter continues. “In particular, the rule would impose burdensome requirements on credit unions’ covered small dollar loans, despite no data suggesting these programs have any pattern of harm to consumers. To the contrary, consumers have stated that credit union loans are often their safest and best option for credit.”
Monterrubio instead urged the Bureau to instead focus on reining in unregulated and underregulated non-depository online, payday, and title lenders, particularly entities with a history of bad behavior.
Other Points Raised
Other points made in the CUNA letter include:
- Should the CFPB chooses not to provide an exemption for all credit union small dollar loans, CUNA said the Bureau should 1) Adopt the proposed rescission of the 2017 Payday Rule’s mandatory underwriting requirement for covered loans, and 2) Substantially expand the “alternative loan” exemption to cover additional Payday Alternative Loan (PAL) options developed by the National Credit Union Administration (NCUA), including the proposed PAL II program.
- CUNA said it supports the proposed rescission of the mandatory underwriting requirements should the Bureau decline to expressly exempt all credit union small dollar loan programs. “In that instance, finalizing the proposed rescission would reduce regulatory burden on credit unions currently offering small dollar loans covered by the rule – but only an express exemption of all credit union small dollar programs would guarantee all credit unions are able to effectively provide their members with access to small dollar credit.”
- CUNA said credit unions recognize that they play an important role in meeting the needs of distressed members, especially when they need a small loan to manage a financial emergency or unplanned situation. “In these instances, a credit union does its best to help the member, whether the member needs a loan to purchase school supplies for their children or a refrigerator to keep food from spoiling.”
- CUNA noted “For years, federal credit unions have offered short term, small dollar credit under the most stringent regulatory requirements: a statutory federal usury ceiling to which no other lenders are subject. Despite this restriction, the NCUA, at credit unions’ urging, has provided them with more flexibility to lend to consumers through the Payday Alternative Loan program.”
- CUNA told the CFPB credit unions and the agency share a common goal: a payday lending rule that curbs the abuses in the small dollar credit system while ensuring credit unions can serve members in a safe and affordable manner. “Unfortunately, the CFPB’s 2017 Payday Rule failed to fully execute that important balance and, instead, the rule’s broad scope unjustifiably covers and curtails reasonable and safe products offered by credit unions. As it currently stands, credit unions believe the rule’s flaws are significant and the Bureau should appropriately tailor the rule’s coverage and exclude credit unions. Therefore, we urge the CFPB to use its authority to exempt credit unions as a class from the rule under Section 1022 of the Dodd-Frank Act.”
- CUNA cautioned the CFPB if the 2017 Payday Rule is permitted take effect unamended, then there would be substantial disruption in the availability of small dollar credit from local credit unions. “In fact, this has already begun to occur. Many credit unions are currently evaluating the rule’s complexity and uncertainty as they decide whether to enter or remain in this market. The scope of the rule is especially arbitrary when considering the most direct impact of the rule would be on credit union lending programs widely recognized as consumer-friendly.”
- CUNA said the mandatory underwriting required for a covered loan is impractical for credit unions to comply with in a sustainable way. “The CFPB’s current rule assumes that all credit union loans will fall under an existing exemption and therefore credit unions’ cost of complying with the restrictive mandatory underwriting requirements would not be overly burdensome. However, CUNA cautions the CFPB to further analyze this presumption, not the least of which is that not all consumer-friendly credit union loans would qualify for an exemption,” the trade group said.
- Specifically, CUNA said it is “concerned that the CFPB’s ATR analysis in some instances would be nearly impossible for a credit union to comply with. For example, credit union underwriters have stated that projecting net income, debt obligations and living expenses is impossible in some circumstances, especially when lending to financially distressed borrowers who may be underemployed, living in rental properties, or facing any number of financial challenges. The pending proposal to rescind the ATR requirements in the 2017 Payday Rule would go a long way towards resolving this burden. However, unless credit unions are fully exempted, merely removing the mandatory underwriting requirement would only provide relief for part of the rule."
Overall, Monterrubio wrote, the Bureau should have “avoided creating an equivalency between credit unions and the payday, online, and title lenders that are the basis for this rule’s existence.”
The full CUNA comment letter can be found here.