CUNA and NAFCU warn of “seismic” impact on CUs of proposed legislation
Lawmakers from the Senate Banking, Housing and Urban Affairs Committee on Thursday discussed a proposal to adopt an “all-in” 36% interest rate cap to apply to all members of credit unions. Currently, this cap only applies to the military. CUNA and NAFCU attempted to explain to committee members how important and “seismic” such a move would be for the entire credit union industry.
In a letter from the two organizations to the Committee, they said: “Adopting an overall cap of 36% will essentially require lenders to offer larger and longer loans because these loans are ‘easier. To go under the ceiling precisely because of their increase in size and duration. The letter continued, “This effectively encourages borrowers to take on more debt or, for many borrowers with lower credit ratings, to exclude them altogether from the small dollar credit market. “
NAFCU and CUNA told committee members that credit unions have seen the damage done by high-cost payday lenders to members and applauded the committee’s efforts to curb or curb these types of financial abuse. Both organizations seemed to believe that this legislation being considered to extend the Military Loans Act, and seen as a possible administrative task, is not so simple and could be problematic for credit unions.
“In doing so, the legislation would not only set a nationwide rate cap, but would also completely change the methodology used to calculate interest rates for non-service consumers. Although seemingly a harmless technical change, the overall impact of an overall APR cap on credit cards and small dollar loans would be seismic, ”the letter said.
In the letter, business organizations pointed out that the “all-in” APR for short-term small dollar loans “is highly dependent on the length and size of the loan”. For example, the NCUA payday loan rule allows principal amounts to vary between $ 200 and $ 1,000 with loan terms of one to six months with application fees of up to $ 20 and an APR of up to 28%. “The CFPB, led by Director Richard Cordray, has determined that loans made within these parameters roughly could be considered a user-friendly alternative to high-cost payday loans and exempt loans generally meeting these characteristics of. the 2017 regulations of the Bureau. But even a loan with the Bureau’s “seal of approval” can easily run up against 36%, ”the letter said.
The letter continued, “Because credit unions tailor their products to the unique needs of their members, there are many other user-friendly credit union products that would also be affected or eliminated by an overall rate cap of 36% as proposed. in the legislation. The propensity of credit unions for transparency and fairness is reinforced by their democratically controlled not-for-profit structure. This culture of accountability and member-driven philosophy are the reasons credit unions – both state and federal – are widely viewed as pro-consumer alternatives to high-cost payday lenders. “
Although the legislation appears to only exempt federal credit unions subject to the usury limit imposed by the NCUA, professional organizations have called on lawmakers “to include all federally insured credit unions – regardless of type of charter ”in this exemption.