The PALs I rule limits the principal amount of a PALs I loan to not less than $200 or more than $1,000. In contrast, the PALs II NPRM proposed to allow an FCU to offer a PALs II loan with a loan amount up to $2,000 without any minimum loan amount. The Board believes that a higher maximum and no minimum loan amount will allow an FCU to meet the demands of more segments of the payday loan market. Furthermore, the PALs II NPRM provided that a higher maximum loan amount will allow some borrowers to cover a larger financial emergency or to consolidate multiple payday loans into a PALs II loan, thereby providing a pathway to mainstream financial products and services offered by credit unions.
Maximum Loan Amount
These commenters argued that $2,000 is insufficient to cover most large financial emergencies that prompt a borrower to resort to a payday loan or to allow a borrower to consolidate all of the borrower’s payday loans. Some of these commenters, however, also look at more info argued that a larger maximum loan amount would be more profitable and allow an FCU to make sufficient interest to cover the cost of this type of lending.
In contrast, some commenters argued that allowing an FCU to charge a 28 percent APR for a $2,000 PALs II loan is a slippery slope to allowing an FCU to operate outside of the usury ceiling. These commenters noted that larger, longer-term loans provide increased revenue to the credit union and, therefore, the Board should not adopt a special exception from the general usury ceiling for these types of products.
While the Board recognizes that $2,000 may be insufficient to cover a larger financial emergency or to allow a borrower to consolidate a considerable number of payday loans, it nevertheless believes that allowing an FCU to offer a $3,000 or $4,000 loan at 28 percent interest is too high a limit and would violate the spirit of the FCU Act. In adopting the PALs I rule, the Board reluctantly established a separate usury ceiling for PALs I loans after a careful determination than an FCU could not Start Printed Page 51948 provide a reasonable alternative to a payday loan under the general usury ceiling. By allowing an FCU to charge a higher interest rate, the Board sought to create a regulatory structure that allowed an FCU to offer a responsible payday loan alternative to members in a prudent manner.
The Board believes that $2,000 is a reasonable limit for the vast majority of PALs II loan borrowers. Accordingly, the Board is also adopting this aspect of the PALs II NPRM as proposed.
Minimum Loan Amount
Several commenters expressed support for removing the minimum loan amount as a means of allowing an FCU to tailor its PALs II program to the unique needs of its members. In contrast, other commenters argued that removing the minimum loan amount would result in a triple digit APR comparable to a traditional payday loan for any PALs II loan under $100 where the credit union also charges an application fee.
The Board believes that an FCU should have the flexibility to meet borrower demand to avoid the need for those borrowers to resort to a traditional payday loan. While the total cost of credit may be high for these loans, the PALs II rule provides significant structural safeguards not present in most traditional payday loans.
Furthermore, the Board does not believe it is prudent for an FCU to require a member to borrow more than necessary to meet the borrower’s demand for funds. Establishing a minimum PALs II loan amount would require a borrower to carry a larger balance and incur additional interest charges to avoid an apparently high APR when a smaller PALs II loan would satisfy that borrower’s need for funds without the additional interest charges. On balance, the Board believes that the borrower’s real need to avoid additional charges outweighs the need to avoid the appearance of a higher APR for smaller PALs II loans. Accordingly, the Board is adopting this aspect of the PALs II NPRM as proposed.