How PALs I and II Can Help Your Credit Unions, Even at 36 Percent APR

 According to 2019 Pew Research, 12 million Americans access payday loans every year, coming in at an annual total of nine billion dollars in loan fees. Credit unions constitute less than two percent of the $38.5 billion payday lending market in the United States.

While many credit union executives have reservations about offering a small dollar loan program at 18, 28, or 36 percent annual percentage rate (APR), predatory payday lenders are targeting the underbanked with astronomical APRs. They often target specific neighborhoods around the nation that have few financial institutions like credit unions, if any, that offer better foundations for financial health and literacy.

Credit unions can help loan borrowers with PAL tools.

Certain credit union industry executives and policymakers believe credit unions can better and more fairly serve everyday loan borrowers with improved Payday Alternative Loan (PAL) tools. In April 2018, the National Credit Union Administration (NCUA) proposed amending the organization’s general lending rule, and for good reason. Back then, the NCUA’s PAL program resulted in fewer than 200,000 loans within the last few years, compared to roughly 100 million payday loans annually. Following the announcement of the proposal, the NCUA received more than 45 letters both supporting and questioning its PALs II proposal, which was designed to level the playing field for credit unions.

On September 19, 2019, the National Credit Union Administration Board approved the PALs II proposal, allowing federal credit unions the ability to offer an increased payday alternative loan option to members. It provided credit unions another financial health tool to help member communities avoid the debt traps that have kept predatory payday lenders in operation for nearly 30 years with APRs averaging over 400 percent. Whereas the maximum principal loan amount for PAL I is $1,000 while the borrower must be a member for a minimum of one month, PAL II’s maximum loan amount is $2,000 with immediate member eligibility.

Such a welcome development brings credit unions the following conundrum: If the credit union industry does not responsibly enter into this small dollar lending arena now, with these financial health tools at our disposal, when will it? If the credit union industry doesn’t enter into this forward-thinking, pro-active, financial wellness-oriented mindset, who will protect the underbanked, many of whom are credit union members?

The Credit Union Cause at 36 Percent APR

According to Statista, there are approximately 5,442 credit unions with assets exceeding $1 trillion in the United States, serving more than 100 million members. However, there are only about 600 credit unions offering small dollar lending. The aforementioned Pew Trusts report found the average payday loan borrower is in debt for five months of the year and spends an average of $520 in interest to repeatedly borrow $375. It is more than obvious the existing system of payday lending has shown to be thoroughly unsustainable for the individuals who need fast liquidity. Our nation’s consumers require a more stable and financially-supportive framework of acquiring short-term funds. There has never been a better time for credit unions, certainly more than 600 of them, to go back to basics and offer a financially-stabilizing small dollar loan program.

Predatory lenders claim high rates exist because the risk is so high. Consumer watchdogs have long criticized payday loans as the debt traps they are by design because the lenders are fully aware the consumer can’t reasonably pay them back on time. The Consumer Financial Protection Bureau (CFPB) reported one in four payday loans are re-borrowed nine times or more. Nick Bourke, director of consumer finance at Pew Charitable Trusts, says, “It’s normal to get caught in a payday loan because that’s the only way the business model works. A lender isn’t profitable until the customer has renewed or reborrowed somewhere between four and eight times.”

Small dollar lending can lead to overall financial wellness.

The U.S. is beginning to see the light at the end of the tunnel, however. The state of Nebraska is the latest to cap their payday loan rates at 36 percent, fulfilling the promise of the initiative by way of petition that got the issue on the November 2020 ballot. The Cornhusker State is the newest of 16 other states and the District of Columbia that have already implemented 36 percent interest limits. Across the nation, 37 states have clear statutes that allow for payday lending, but with restrictions like varying interest rate caps and maximum loan amounts.

Why have regulators chosen 36 percent as the appropriate interest rate? The NCUA Board heard commenters from across the industry noted that a 36 percent maximum interest rate would reflect the rate used by the CFPB in deciding whether certain high-cost loans are “covered loans” within the payday lender rule while providing a regulatory uniformity for FCUs offering PALs. Additional feedback reflected the idea that increasing the maximum interest rate to 36 percent would help FCUs to compete more effectively with payday lenders for market share.

Last November federal lawmakers introduced bipartisan legislation through the Veterans and Consumers Fair Credit Act that would cap interest rates at 36 percent for all consumers nationwide. This latest campaign to stop payday loans at the federal level was constructed from the basic structure of the 2006 Military Lending Act, with capped loans at 36 percent for active duty service members. Despite support from both Republicans and Democrats, the bills stalled, and state groups like Nebraska had to move forward with more local campaigns in bringing additional small dollar loan options to their communities.

QCash Financial is one of many fintech credit union service organizations (CUSOs) looking to eliminate predatory lending by developing flexible solutions to meet regulatory, member, mission, and margin needs. Credit unions should be leading this movement on behalf of their community members and neighbors’ financial health.

“The credit union industry has to combat predatory lenders in their communities, because if we don’t do it now, when will we?”, says our own QCash Financial CEO Ben Morales. “We have to put member needs first, while securing respective bottom lines.”

QCash Financial is prepared to help your credit union bring financial health and stability to your surrounding communities. If you would like more information on QCash Financial’s automated, digital small-dollar loan platform, go to our website.

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