What a drama it’s been for small dollar lending (SDL) these last 40 years.
From the late 1970s through the 1980s, a series of federal law developments resulting in banking deregulation gave rise to the predatory payday lending storefronts of the early 1990s through this 21st century.
Predatory lending certainly took advantage in the early ‘90s with just a few hundred storefronts across the country, then growing to over 22,000 by the end of the 2010s. As of 2019 predatory lenders dominate a $27 billion market that typically ranges between $300 to $5,000 per loan, according to a 2018 report from the Office of the Comptroller of the Currency (OCC). The expansion of predatory lending through the next two and a half decades and the Great Recession that followed 2008 brought increasing federal and regulatory attention to the payday lending industry and their exorbitant fee structures.
Enter the National Credit Union Administration (NCUA) and its chairman Rodney Hood to the rescue. In the effort to set a new standard for credit unions offering a better, more affordable alternative for the unbanked and underbanked, Hood announced the NCUA was now updating a 2010 rule allowing federal credit unions to expand their menu of small dollar loan options by doubling the amount available in a payday alternative loan (PAL), a PAL II. Here are the details:
- The PAL II does not take the place of the current PAL. While the existing PAL permits credit unions to offer loans between $200 and $1,000, the PAL II raises the limit to $2,000 while waiving the requirement that new credit union members wait 30 days to get a loan. This new loan thereby provides access to needed credit in a timely manner.
- The PAL II allows borrowers to carry the term up to a year, whereas the PAL ranges from only one month to six months
- The PAL II alternative loan preserves its forerunner’s maximum interest rate of 28%
- Borrowers can take up to three PAL II loans over a six-month period, however they have to be limited to one kind of PAL at a time
- The PAL and PAL II loans offer borrowers at least 1 month to 1 year to pay back the loan as opposed to payday loans, which have a window of only 14 days
As one may surmise, credit union PAL and PAL II small dollar loans are meant to steer borrowers away from the predatory payday lenders who have been in business for nearly three decades. According to Pew Charitable Research, the national average for annual percentage rates (APRs) stands at 391%. Some states, Idaho, Nevada, Utah, Ohio, and Virginia, hold their APRs even higher, with Texas at 667%. In 2018, a Federal Deposit Insurance Corporation (FDIC) report detailed how tens of millions of Americans do not have access to reliable and accessible savings or checking accounts. Such unbanked or underbanked Americans reside on a knife’s edge of fiscal danger; urgent situations like a job loss, auto repairs, unexpected hospital visit or emergencies, all unaffordable to the financially unwell.
Such APRs are payday loans in name only; in truth, they’re debt traps intent on repeat business by weekly roll-overs, folding into bigger and bigger traps difficult to escape. PAL and PAL II loans can be the beginning of financial recovery for many with structured planning and financial awareness programs through a credit union. This PAL II loan rule from the NCUA represents a significant step in the right direction for federal credit unions, possessing the flexibility to extend affordable small dollar loans to their members and to better assist low- to moderate-income borrowers with the path to escape debt and achieve financial inclusion and wellness.
Chairman Hood celebrated the NCUA’s newest offering, saying “We want to encourage responsible lending that allows consumers to address immediate needs while working towards fuller financial inclusion.”
The future just got a lot brighter for millions of Americans, no drama required.