(Current as of June 15, 2016)
§701.21 Loans to members and lines of credit to members.
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(c) General rules—
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(7) Loan interest rates—
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(iii) Payday alternative Loans (PAL loans).
(A) Notwithstanding the provisions in §701.21(c)(7)(ii), a Federal credit union may charge an interest rate of 1000 basis points above the maximum interest rate as established by the Board, provided the Federal credit union is making a closed-end loan in accordance with the following conditions:
(1) The principal of the loan is not less than $200 or more than $1000;
(2) The loan has a minimum maturity term of one month and a maximum maturity term of six months;
(3) The Federal credit union does not make more than three PAL loans in any rolling six-month period to any one borrower and makes no more than one payday alternative loan at a time to a borrower;
(4) The Federal credit union must not roll-over any PAL loan;
(A) The prohibition against roll-overs does not apply to an extension of the loan term within the maximum loan terms in paragraph (c)(7)(iii)(3) provided the Federal credit union does not charge any additional fees or extend any new credit.
(B) [Reserved]
(5) The Federal credit union fully amortizes the loan;
(6) The Federal credit union sets a minimum length of membership requirement of at least one month;
(7) The Federal credit union charges an application fee to all members applying for a new loan that reflects the actual costs associated with processing the application, but in no case may the application fee exceed $20; and
(8) The Federal credit union includes, in its written lending policies, a limit on the aggregate dollar amount of loans made under this section of a maximum of 20% of net worth and implements appropriate underwriting guidelines to minimize risk; for example, requiring a borrower to verify employment by producing at least two recent pay stubs.
(B) PAL Loan Program Guidance and Best Practices. In developing a successful PAL loan program, a Federal credit union should consider how the program will help benefit a member’s financial well-being while considering the higher degree of risk associated with this type of lending. The guidance and best practices are intended to help Federal credit unions minimize risk and develop a successful program, but are not an exhaustive checklist and do not guarantee a successful program with a low degree of risk.
(1) Program Features. Several features that may increase the success of a PAL loan program and enhance member benefit include adding a savings component, financial education, reporting of members’ payment of PAL loans to credit bureaus, or electronic loan transactions as part of a PAL program. In addition, although a Federal credit union cannot require members to authorize a payroll deduction, a Federal credit union should encourage or incentivize members to utilize payroll deduction.
(2) Underwriting. Federal credit unions need to develop minimum underwriting standards that account for a member’s need for quickly available funds, while adhering to principles of responsible lending. Underwriting standards should address required documentation for proof of employment or income, including at least two recent paycheck stubs. FCUs should be able to use a borrower’s proof of recurring income as the key criterion in developing standards for maturity lengths and loan amounts so a borrower can manage repayment of the loan. For members with established accounts, FCUs should only need to review a member’s account records and proof of recurring income or employment.
(3) Risk Avoidance. Federal credit unions need to consider risk avoidance strategies, including: requiring members to participate in direct deposit and conducting a thorough evaluation of the Federal credit union’s resources and ability to engage in a PAL loan program.