The highly touted NCUA Payday Lending Alternative model is not an effective replacement for storefront short-term lenders that charge customers exorbitant interest rates, Nick Bourke, director of The Pew Charitable Trusts’ consumer finance project said Monday.
“The PAL program is well-regarded, and it has helped some people gain access to loans that are better than payday loans and cost less,” Bourke said, in an interview, as Pew released its guidelines for payday loans.
He added that “Most credit unions do not participate, and there are fewer than 200,000 PAL loans per year compared to about 100 million payday loans.”
“Millions of households could benefit if banks and credit unions were to offer small installment loans and lines of credit with standards strong enough to protect consumers, clear enough to avoid confusion or abuse, and streamlined enough to enable automated low-cost origination,” Pew said.
Pew has been at the forefront of the battle over payday lending.
In its new report, Pew said that regulatory uncertainty has hampered efforts to develop fair products. The CFPB has issued final rules governing payday loans. Those rules would exempt loans modeled on the PAL program.
But Acting CFPB Director Mick Mulvaney has said he may roll back the rules, which were issued by his predecessor, Richard Cordray.
In its report, Pew said:
- Research has shown that borrowers who might seek payday loans can afford payments of about 5% of their paychecks.
- Fees, other than an application or annual fee, should be charged monthly to ensure they are spread out during the life of a loan.
- Lenders should ensure that the total cost of a small-dollar loan never exceeds half of the loan principal.
- To keep the cost low, banks and credit union should largely automate the lending process.
- Customers should be prescreened to determine eligibility.
- Loan should be reported to credit bureaus to help consumers build up a good credit report.
- Providers should design a program that ensures that no more than 10% of the loans go into default.
- Small dollar loans should not trigger overdraft or nonsufficient funds fees.
- Each lender should ensure that it is offering one small loan at a time to borrowers.
In examining the PAL program, Bourke said the loans call for a minimum loan term of one month, but do not set standards for affordable payments.
Pew’s guidelines and the PAL program have similar pricing philosophies, Bourke said. But Pew’s standards would allow APRs that are higher than credit cards as long as they are double-digit. The PAL program places stricter limits that result in reduced revenue. That may be part of the reason for so few credit unions participating in the program, he said.
While Pew favors limiting tot total cost of the loan to 50% of the original loan amount, the PAL program sets a fixed maximum duration of six months. This could make it difficult for credit unions to compete with payday lenders, Bourke said.
