Short-Term, Small Amount Loans, 58285-58290 [2010-23610]

Download as PDF 58285 Rules and Regulations Federal Register Vol. 75, No. 185 Friday, September 24, 2010 This section of the FEDERAL REGISTER contains regulatory documents having general applicability and legal effect, most of which are keyed to and codified in the Code of Federal Regulations, which is published under 50 titles pursuant to 44 U.S.C. 1510. The Code of Federal Regulations is sold by the Superintendent of Documents. Prices of new books are listed in the first FEDERAL REGISTER issue of each week. NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Part 701 RIN 3133–AD71 Short-Term, Small Amount Loans National Credit Union Administration (NCUA). ACTION: Final rule. AGENCY: NCUA is amending its general lending rule to enable Federal credit unions (FCUs) to offer short-term, small amount loans (STS loans) as a viable alternative to predatory payday loans. The amendment permits FCUs to charge a higher interest rate for an STS loan than is permitted under the general lending rule, but imposes limitations on the permissible term, amount, and fees associated with an STS loan. This final rule also requires an FCU to set a cap on the total dollar amount of STS loans it will make and to set a length of membership requirement of at least one month. Also, any loan under this rule must be fully amortized. The STS loan alternative will assist FCUs in meeting their mission to promote thrift and meet their members’ credit needs, particularly the provident needs of members of modest means. Permitting a higher interest rate for STS loans will allow FCUs to make loans cost effective while the limitations will appropriately constrain the product to meeting its purpose as an alternative to predatory credit products. This final rule also includes guidance in the form of ‘‘best practices’’ FCUs should consider incorporating into their individual STS programs. DATES: This rule will become effective on October 25, 2010. FOR FURTHER INFORMATION CONTACT: Justin M. Anderson, Staff Attorney, Office of General Counsel, at the above address or telephone (703) 518–6540. hsrobinson on DSK69SOYB1PROD with RULES SUMMARY: VerDate Mar<15>2010 16:35 Sep 23, 2010 Jkt 220001 SUPPLEMENTARY INFORMATION: C. Summary of Comments A. Background 1. General While most commenters supported the idea and framework of the rule, many commenters offered a suggestion on one or more aspects of the proposal. There were, however, three commenters that supported the proposed rule as drafted, four that did not support the rule, and one that only provided details about its payday alternative program. The commenters that supported the rule as written believe the rule would be a valuable tool FCUs could use to assist their members, is in line with the mission and purpose of the FCU charter, and would provide members with a way to safely break the payday loan cycle. Of the commenters that did not support the rule, one commenter generally opposed the idea of payday lending and believed NCUA should monitor and regulate existing programs, rather than help foster an alternative. Two other commenters did not believe the terms of the rule would be attractive to FCUs or borrowers. Finally, one commenter believed credit unions should be permitted to develop their own programs instead of NCUA creating one. With respect to the last comment, the Board notes this final rule does not prohibit an FCU from continuing or participating in a closed or open-end payday loan program that operates successfully and legally under NCUA’s Regulations and the Federal Reserve Board’s Regulation Z (Reg Z). 12 CFR Part 226. The Federal Credit Union Act (the Act) permits FCUs to make loans and extend lines of credit to members but prohibits FCUs from charging an annual percentage rate (APR), inclusive of all finance charges, above 15%. 12 U.S.C. 1757(5)(A)(vi). The Act, however, permits the NCUA Board (the Board), after considering certain statutory criteria, to establish a higher interest rate ceiling in 18-month cycles. Id. At its July 2009 meeting, the Board reapproved an APR ceiling of 18%, effective until March 10, 2011. NCUA Letter to Federal Credit Unions 09– FCU–06 (July 2009). The Board reviewed NCUA’s regulatory structure and recognized that under this current structure many FCUs could not provide their members with a reasonable alternative to traditional payday loans. The Board, therefore, considered amending its regulations to provide FCUs with a regulatory structure under which they could offer a responsible payday loan alternative to members in a safe and sound manner. B. Proposed Rule On April 29, 2010, the Board issued a proposed rule amending § 701.21 to increase the interest rate ceiling for STS loans, provided FCUs made the loans within the requirements of the rule. 75 FR 2447 (May 5, 2010). The Board also specifically asked for comments on the issues of amortization, utilizing a 36% APR inclusive of all fees, and requiring members to participate in direct deposit or payroll deduct. The comment period closed on July 6, 2010. The Board received 33 comments from: Two credit union trade associations; one bank trade association; two private citizens; sixteen credit unions; seven State credit union leagues; three consumer advocacy groups; one credit union service organization; and one philanthropic foundation. Commenters addressed a wide range of issues including the different requirements of the rule, those areas where the Board specifically requested comment, and other aspects of payday lending that were not related to this rule. PO 00000 Frm 00001 Fmt 4700 Sfmt 4700 2. Specific Comments and NCUA’s Response The remaining 25 commenters generally supported the rule, but offered suggestions on specific aspects of the rule or provided comments on the sections where the Board specifically requested comments. The Board considered all of the comments and modified the final rule where appropriate. The specific comments and NCUA’s responses are discussed in the following section-by-section analysis. a. Permissible Interest Rate A majority of the commenters believed an interest rate ceiling of 1000 basis points above the established general interest rate ceiling, as set by the Board, was sufficient for FCUs offering an STS product. As noted above, the Board set interest rate ceiling is E:\FR\FM\24SER1.SGM 24SER1 hsrobinson on DSK69SOYB1PROD with RULES 58286 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations currently at 18%. A few other commenters, however, provided alternative suggestions for the Board’s consideration. Two commenters believed the interest rate ceiling for STS loans should be higher to account for the higher degree of risk associated with this type of lending, but did not provide a specific interest rate they favored. Two other commenters believed a 36% all inclusive APR was appropriate, citing a relation to the Department of Defense (DOD) regulations and the need to keep costs as low as possible for borrowers. Two commenters advocated maximum flexibility and believed FCUs should be permitted to choose between a 36% all inclusive APR and the proposed rate and fee structure. One commenter believed the APR for STS loans should be 36% plus a $20 application fee. Other individual commenters suggested approaches, such as an 18% APR with a broader definition of finance charges, allowing a 28% APR for all legally permissible payday programs, and not increasing the APR at all. The Board has considered these comments and, based on the reasons set forth in the preamble to the proposed rule, has decided to proceed with the proposed structure of an APR 1000 basis points above the Board approved interest rate ceiling, which currently would be 28%, and a $20 application fee. With respect to the comments on FCUs being able to offer this product to members of the military, the Board notes that the definition of a payday loan in the DOD regulations would not include most loans made under this final rule. The DOD regulations provide the following definition of a payday loan: (i) Payday loans. Closed-end credit with a term of 91 days or fewer in which the amount financed does not exceed $2,000 and the covered borrower: (A) Receives funds from and incurs interest and/or is charged a fee by a creditor, and contemporaneously with the receipt of funds, provides a check or other payment instrument to the creditor who agrees with the covered borrower not to deposit or present the check or payment instrument for more than one day, or; (B) Receives funds from and incurs interest and/or is charged a fee by a creditor, and contemporaneously with the receipt of funds, authorizes the creditor to initiate a debit or debits to the covered borrower’s deposit account (by electronic fund transfer or remotely created check) after one or more days. This provision does not apply to any right of a depository institution under VerDate Mar<15>2010 16:35 Sep 23, 2010 Jkt 220001 statute or common law to offset indebtedness against funds on deposit in the event of the covered borrower’s delinquency or default. 32 CFR 232.2. Under the terms of this final rule, all STS loans will be for less than $2,000 and many will have maturities less than 91 days. The terms of this final rule, however, do not require an FCU to obtain a check or payment instrument or authorization to debit a member’s account contemporaneously with an extension of credit. Further, NCUA does not generally expect FCUs to need to require a check or payment instrument and, as discussed below, FCUs are prohibited from conditioning the extension of credit on a member’s consent for electronic debit. An FCU, therefore, will typically be able to offer loans under the terms of this rule to members of the military without violating the DOD regulations. b. Loan Term Approximately one-third of the commenters submitted comments on the proposed permissible loan term. Of those commenters, most believed the minimum loan term should be greater than 30 days, with commenters citing a range between 90–120 days as an acceptable minimum term. Some commenters also believed the maximum loan terms should also be longer, citing 12 to 18 months as an acceptable range for the maximum loan term. The commenters who advocated for a longer term believed that a longer term was necessary to enable borrowers to pay back a loan in small, more manageable payments. After considering the comments and for the reasons articulated in the preamble to the proposed rule, the Board has decided to keep the proposed terms of a minimum maturity of one month and a maximum maturity of six months. The Board believes this final rule should provide a high level of protection for borrowers, and is concerned that longer term loans may actually have unintended negative consequences. The Board is specifically concerned that borrowers with longer term STS loans may continue to use payday lenders to cover expenses that arise during repayment. While it is possible that this scenario may also occur under the maturity structure in this rule, the Board believes loans with maturities between one and six months will provide borrowers with frequent enough access to credit to minimize the need for additional loans from payday lenders. To effectuate the beneficial nature of a one to six month maturity PO 00000 Frm 00002 Fmt 4700 Sfmt 4700 and ensure maximum borrower protection, the Board is reaffirming its statement in the preamble to the proposed rule that FCUs should structure the terms of an STS loan in a way that allows a borrower to repay the loan in the given term. NCUA will scrutinize an FCU’s program to ensure loans are being made in a way that provides a member with the best chance to successfully repay a loan made under this rule. c. Number of Loans and Roll-Overs Approximately one-third of the commenters addressed the issues of rollovers and the permissible number of loans. While most commenters agreed the final rule should prohibit roll-overs, there were three commenters that believed roll-overs could be appropriate in limited circumstances. The commenters cited that without rollovers a borrower who cannot pay off the loan within the loan term will incur late fees and, possibly, a negative entry on his or her credit report. Also, one commenter asked for further clarification of the term ‘‘roll-over’’ in the final rule. After considering these comments, the Board has determined to keep the prohibition against roll-overs, but will provide some flexibility in the final rule so borrowers can meet their payment obligations without incurring additional fees. While the Board continues to disagree that roll-overs are ever appropriate, it believes permitting FCUs to extend the term of a loan, without any additional fees, may be beneficial to both FCUs and borrowers. The prohibition against roll-overs in this rule applies to situations in which a borrower is charged additional fees for extending or ‘‘re-borrowing’’ funds to avoid delinquency. Under this rule, an FCU may, however, extend the term of the loan, within the maximum loan term set by this rule, provided the FCU does not charge any additional fees, except interest, or extend any additional funds. For example, if a borrower takes out a $300 loan for three months and, at some point within those three months, is unable to continue making payments, the FCU can extend the loan term for another one to three months, but cannot extend any new credit or charge additional fees in connection with this extension. The Board believes allowing for an extension without any additional fees will provide borrowers with the best opportunity to repay the loan and avoid delinquencies. NCUA generally expects FCUs, however, to set the term and amount of the loan in a way that allows borrowers to repay it within the E:\FR\FM\24SER1.SGM 24SER1 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations hsrobinson on DSK69SOYB1PROD with RULES term and avoid the need to extend a loan. With respect to the number of loans, most commenters believed there should be a higher limit on the number of loans a borrower may have in a 12-month period or no cap at all. Commenters believed that the number imposed in the proposed rule was too limiting and could drive borrowers back to payday lenders. After considering these comments the Board has determined to proceed with the terms in the proposed rule, which limit FCUs to making only one loan at a time to a member and no more than three in any rolling six-month period. In response to the commenters advocating for a higher number of loans, the Board disagrees that a limited number of loans will push borrowers back to payday lenders. As noted above, the Board intends this rule to provide borrowers with enough access to credit to preclude the need for a borrower to also borrow from a payday lender. The Board also intends this rule to help borrowers curtail the repetitive use of payday loans and transition them to more mainstream financial products and more responsible borrowing. A cap of three loans in any rolling six-month period coupled with the minimum and maximum maturities, set out above, achieves this balance of providing borrowers with sufficient access to credit while helping borrowers transition from a reliance on repetitive borrowings. d. Application Fee and Amount of the Loan Approximately one-half of the commenters addressed the appropriate amount of an application fee. Two commenters believed $20 was an appropriate amount but two other commenters felt an application fee should be capped at $25. Of the remaining commenters, four believed the application fee should be higher, but did not provide a specific amount and several commenters believed FCUs should be permitted to set their own application fees in accordance with Regulation Z or the application fee should be tied to the amount of the loan. All commenters who sought a higher application fee cited an increased risk in this type of lending. Two commenters believed FCUs should charge a borrower only one $20 application fee every six months and two commenters believed the Board should not permit FCUs to charge any fees for these loans, including application and late fees. All commenters who favored a lower fee or no fee cited a minimal underwriting process that does not justify a fee. VerDate Mar<15>2010 16:03 Sep 23, 2010 Jkt 220001 After considering the comments, the Board has decided to keep the proposed maximum application fee of $20. While the Board agrees that this type of lending is inherently riskier than many other types of lending, it is interest income and not the application fee that allows FCUs to offset the higher degree of risk. The Board notes, Reg Z limits application fees to the recovery of costs associated with processing applications for credit that are charged to all consumers who apply, regardless if credit is actually extended. 12 CFR 226.4(c)(1). For the reasons articulated in the preamble to the proposed rule, the Board believes a maximum application fee of $20 is sufficient to allow FCUs to recoup the costs associated with processing an application for an STS loan. With regard to those commenters who argued for a lower application fee or a restriction that application fees be charged only once in a six-month period, the Board points out that $20 under this rule is the maximum amount FCUs can charge for an application fee and that FCUs are still bound by the definition of application fee in Reg Z. As such, an FCU’s application fee can only be the amount needed to recoup the actual costs associated with processing an application. If an FCU undertakes a more limited application process with repeat borrowers, there would be no justification for charging the same application fee each time the borrower applied. NCUA will scrutinize application fees to ensure FCUs are using the fee to recoup costs associated with processing an application and not to account for the riskier nature of this type of lending. On the issue of the permissible amount of a loan, slightly less than onehalf of the commenters provided suggestions. A majority of the commenters believed the minimum loan amount should be less than $200, citing a high demand for loans between $50 and $100. One commenter believed the minimum loan amount was acceptable, but the maximum loan amount should be $2,500. Finally, one commenter believed that the maximum amount should be lowered because most payday borrowers cannot pay back $1,000, even over a six-month period. The Board believes the proposed minimum loan amount of $200 and the proposed maximum amount of $1000 are appropriate and has included these amounts in the final rule. With respect to those commenters who advocated for a lower minimum amount, the Board notes, as discussed above, that this rule does not prohibit FCUs from making smaller loans that are legal under PO 00000 Frm 00003 Fmt 4700 Sfmt 4700 58287 NCUA’s regulations and Reg Z. Also, as noted in the preamble to the proposed rule, a minimum loan amount of $200 is in-line with the typical loan extended to payday loan borrowers. In response to the commenter who argued that the maximum loan amount should be $2,500, the Board does not believe it would be prudent to allow FCUs to lend amounts over $1,000 to borrowers at terms of six months or less. As noted in the preamble to the proposed rule, the Board chose a maximum loan amount of $1,000 because it may allow borrowers to repay loans from payday lenders and transition to more traditional FCU products while still being a manageable short-term loan. Finally, in response to the comment that most borrowers could not pay back $1,000 in six months and, therefore, the maximum amount should be lower, the Board notes the discussion above regarding the impetus for a maximum loan of $1,000. In addition, as discussed earlier in this preamble, the Board expects FCUs to extend loans to borrowers in amounts and under terms in which the borrower can manage repayment of the loan, within the confines of this rule. e. Amortization and Length of Membership Requirements In response to the Board’s specific request for comment on the issue of amortization, approximately one-third of the commenters provided a response. The majority of those commenters believed that the final rule should require FCUs to fully amortize STS loans. There were two commenters, however, that believed FCUs should have the option to use balloon payments, citing that, in limited circumstances, balloon payments may actually benefit members. The Board agrees with the majority of the commenters that FCUs should fully amortize loans made under this rule, and is including a specific requirement in the final rule. The Board notes that balloon payments often create additional difficulty for borrowers trying to repay their loans, and requiring FCUs to fully amortize the loans will allow borrowers to make manageable payments over the term of the loan, rather than trying to make one large payment. Under the requirement to amortize a loan, FCUs must structure the payments so that the borrower is paying a portion of the principal and interest in equal or near-equal installments on a periodic basis over the course of the loan. While the Board is not prescribing specific payment schedules, i.e., monthly or bi-weekly, E:\FR\FM\24SER1.SGM 24SER1 58288 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations FCUs should offer payment schedules that allow borrowers to easily repay the loan within the given term. Approximately one-quarter of the commenters addressed the issue of a length of membership requirement. Of those commenters, all but one believed FCUs should have the option to impose a length of membership requirement, but that it should not be a regulatory requirement. The Board disagrees that FCUs should have the option of setting a length of membership requirement and has included a requirement in the final rule that FCUs set a length of minimum membership requirement of at least one month. The Board wants to provide FCUs with as much flexibility as possible in developing an STS loan program, but it must consider the riskier nature of this type of loan and the safety and soundness of the FCUs offering them. The Board believes a minimum membership requirement of one month will build a meaningful relationship between the borrower and the FCU and help reduce the chance of a borrower defaulting on an STS loan. While the final rule imposes a minimum requirement of one month, individual FCUs should evaluate their risk tolerance and set a membership requirement accordingly. hsrobinson on DSK69SOYB1PROD with RULES f. Lending Cap and Payroll Deduct/ Direct Deposit Less than a quarter of the commenters addressed the issue of a lending cap. Of those commenters, there was an even split between the number of commenters that believed NCUA should impose a cap and those that believed the Board should permit FCUs to set their own cap. The Board received three suggestions on how to establish a cap: Setting a cap at 20% of net worth; 5– 10% of assets; and a cap only on the dollar amount of total loans made as a percentage of net worth. After considering these comments, the Board has decided to require FCUs to set a cap in their written lending policies on the aggregate dollar amount of loans outstanding not to exceed 20% of total net worth. While the Board believes it is preferential to allow an FCU to evaluate its own risk tolerance and resources in setting a cap, the Board also wants to provide FCUs with a ceiling to ensure any cap set by an FCU is sufficient from a safety and soundness perspective. The Board believes a cap on the aggregate dollar amount with a ceiling of 20% net worth will be sufficient to ensure FCUs are not exposed to unnecessary risks and their resources are not stretched. Depending on the success of these programs, the VerDate Mar<15>2010 16:03 Sep 23, 2010 Jkt 220001 Board can consider raising the cap ceiling at a later date. Over half of the commenters addressed the issue of requiring credit unions to provide STS loans only to members that had direct deposit or authorized payroll deduction. Of those commenters, nearly three-quarters believed FCUs should have the option to require direct deposit or payroll deduct as part of their program, but it should not be a regulatory requirement. One commenter believed it should be a regulatory requirement and three believed the rule should specifically prohibit the practices. One of the commenters that believed the rule should prohibit the practices stated that requiring payroll deduct to obtain a loan was prohibited by the Federal Reserve Board’s Regulation E. The Board agrees with a majority of the commenters that direct deposit and payroll deduct for members should not be regulatory requirements. While the Board believes direct deposit is a useful tool for limiting risk, it recognizes that a regulatory requirement may restrict FCUs from offering STS loans to members who may not have access to direct deposit. Rather, the Board believes an FCU should be able to evaluate its risk tolerance and members’ needs in determining whether or not to require members to participate in direct deposit in order to borrow an STS loan. On the issue of payroll deduct, the Board notes that Regulation E prohibits financial institutions, including FCUs, from conditioning an extension of credit to a consumer on the consumer’s repayment by preauthorized electronic fund transfers. 12 CFR 205.10(e)(1). However, under Regulation E, FCUs can offer members a lower rate or other incentives if they participate in payroll deduct. 12 CFR Part 205, Supplement I, 205.10(e)(1). The Board believes that payroll deduction is an important tool for FCUs to utilize in lowering the risk associated with these loans. Based on these considerations, the Board will let individual FCUs decide if they wish to provide an incentive to or encourage members to utilize payroll deduct or other pre-authorized electronic fund transfers, but will not include any regulatory requirement. The Board is also modifying the best practices section in the final rule to reflect these legal considerations regarding payroll deduction. g. Underwriting and Best Practices In addition to comments on the specific requirements of the rule, the Board also received a few comments requesting that it not require specific underwriting criteria in the regulation PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 and also not change the best practices section into regulatory requirements. With regard to underwriting, the Board will proceed with the approach in the proposed rule that an FCU is required to establish underwriting standards in its written lending policies, but the Board will not require specific standards. The Board believes an FCU is in the best position to evaluate the needs of its members and its risk tolerance and set appropriate underwriting standards. The Board will also keep the underwriting in the best practices section to provide FCUs with guidance on how to structure underwriting for STS loans. With respect to the best practice section, the Board will keep the approach in the proposed rule and offer this section as guidance and not as a regulatory requirement. While the Board believes the suggestions in the best practices section may be beneficial to FCUs and members, the Board also believes an FCU should have flexibility to determine the features of its own program. h. Other Comments In addition to the comments addressed above, the Board received several comments that did not address specific features of the rule, but warrant a discussion in this preamble. Several commenters asked NCUA to collect data about STS loans under this rule and reevaluate the requirements in a year. The Board agrees with these commenters and will modify the 5300 call report by January 2011 to include new sections to evaluate loan programs under this rule. One year from the effective date of this final rule the Board will evaluate the data collected on the 5300 call report and reevaluate the requirements in the final rule. There were also several commenters that urged NCUA to take enforcement actions against FCUs that are offering predatory payday lending products. The Board notes that NCUA staff will continue to investigate programs that may be predatory in nature and take action where appropriate. D. Dodd-Frank Wall Street Reform and Consumer Protection Act (The DoddFrank Act) The Dodd-Frank Act, signed into law by President Obama on July 21, 2010, includes, as Title XII, the Improving Access to Mainstream Financial Institutions Act of 2010 (Title XII). Title XII includes, among other things, Federal assistance to Federally-insured financial institutions that are providing small-dollar value loans. Specifically, § 1205 of Title XII authorizes the E:\FR\FM\24SER1.SGM 24SER1 hsrobinson on DSK69SOYB1PROD with RULES Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations Secretary of the Treasury to establish multi-year demonstration programs by means of grants, cooperative agreements, financial agency agreements, and similar contracts or undertakings with eligible entities to provide low-cost, small loans to consumers that will provide alternatives to more costly small dollar loans. The Dodd–Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, § 1205 (2010). Institutions participating in programs under this section are required to promote and provide financial education and literacy to small-dollar loan borrowers. In addition, section 1206 amends the Community Development Banking and Financial Institutions Act of 1994 by requiring the Community Development Fund (the Fund) to make grants to community development financial institutions (CDFIs) and to any other Federally insured depository institution with a primary mission to serve targeted investment areas to enable such institutions to establish a loan-loss reserve fund to defray the costs of a small dollar loan program established or maintained by such institution. Id. at section 1206(a)(1). Institutions accepting grants under this section are required to provide non-Federal matching funds in an amount equal to 50% of the grant. This section also requires the Fund to make technical assistance grants to be used for technology, staff support, and other costs associated with establishing a small-dollar loan program. To receive a grant or technical assistance grant under this section, a financial institution must have or establish a program with loans under $2,500 that are paid in installments with no prepayment penalties, and the institution must report payments of the loan to at least one consumer reporting agency and meet any other affordability requirements established by the Administrator of the Fund. Id. at section 1206(b). Title XII also grants the Secretary of the Treasury the authority to issue regulations implementing and administering the grants and programs discussed in Title XII. Id. at section 1209. The Board would like to clarify that the requirements of this final rule will not prohibit an FCU, which is otherwise eligible, from receiving a grant or participating in a program under Title XII. The requirements and best practices guidance in the final rule are in line with the requirements imposed by Title XII on participating financial institutions. FCUs will be able to comply with the requirements of the final rule to take advantage of the higher VerDate Mar<15>2010 16:03 Sep 23, 2010 Jkt 220001 interest rate and still be within the limitations of Title XII. As discussed above, the Secretary of the Treasury has the authority to issue regulations implementing Title XII and the Administrator of the Fund can impose other affordability requirements for grants. The Board will review any regulations or requirements related to the Title XII grants and programs and compare them to the requirements in the final rule to ensure FCUs with STS loan programs can continue to take advantage of the benefits included in Title XII. Regulatory Procedures Regulatory Flexibility Act The Regulatory Flexibility Act requires NCUA to prepare an analysis to describe any significant economic impact a proposed rule may have on a substantial number of small credit unions (those under $10 million in assets). This final rule increases the interest rate ceiling for STS loans and sets out several STS loan program requirements an FCU must meet to take advantage of the higher interest rates. The final rule will not have a significant economic impact on a substantial number of small credit unions, and, therefore, a regulatory flexibility analysis is not required. Small Business Regulatory Enforcement Fairness Act The Small Business Regulatory Enforcement Fairness Act (SBREFA) of 1996, Public Law 104–121, provides generally for congressional review of agency rules. A reporting requirement is triggered in instances where NCUA issues a final rule as defined by Section 551 of the Administrative Procedures Act. 5 U.S.C. 551. The Office of Information and Regulatory Affairs, an office within OMB, is currently reviewing this rule, and NCUA anticipates it will determine that, for purposes of SBREFA, this is not a major rule. Paperwork Reduction Act This rule adds a requirement that Federal credit unions establish a cap on short-term, small-dollar loans in their general written lending policies, which Federal credit unions are already required to maintain and is currently approved under the Paperwork Reduction Act control number 3133– 0139. NCUA has determined that the requirements of this rule are additions to an FCU’s customary business records and do not increase the paperwork requirements under the Paperwork Reduction Act of 1995 and regulations PO 00000 Frm 00005 Fmt 4700 Sfmt 4700 58289 of the Office of Management and Budget. Executive Order 13132 Executive Order 13132 encourages independent regulatory agencies to consider the impact of their actions on State and local interests. In adherence to fundamental federalism principles, NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies with the executive order. The final rule will not have substantial direct effects on the States, on the connection between the national government and the States, or on the distribution of power and responsibilities among the various levels of government. NCUA has determined that this final rule does not constitute a policy that has federalism implications for purposes of the executive order. The Treasury and General Government Appropriations Act, 1999—Assessment of Federal Regulations and Policies on Families NCUA has determined that this final rule would not affect family well-being within the meaning of section 654 of the Treasury and General Government Appropriations Act, 1999, Public Law 105–277, 112 Stat. 2681 (1998). List of Subjects in 12 CFR Part 701. Credit unions, Federal credit unions. By the National Credit Union Administration Board on September 16, 2010. Mary Rupp, Secretary of the Board. For the reasons discussed above, the National Credit Union Administration is amending 12 CFR chapter VI as set forth below: ■ PART 701—ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS 1. The authority citation for part 701 continues to read as follows: ■ Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 1761b, 766, 1767, 1782, 1784, 1787, 1789. Section 701.6 is also authorized by 15 U.S.C. 3717. Section 701.31 is also authorized by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601–3610. Section 701.35 is also authorized by 42 U.S.C. 4311– 4312. 2. In § 701.21 add paragraph (c)(7)(iii) to read as follows: ■ § 701.21 Loans to members and lines of credit to members. * * * (c) * * * E:\FR\FM\24SER1.SGM 24SER1 * * hsrobinson on DSK69SOYB1PROD with RULES 58290 Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / Rules and Regulations (7) * * * (iii) Short-term, small amount Loans (STS 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 STS loans in any rolling six-month period to any one borrower and makes no more than one short-term, small amount loan at a time to a borrower; (4) The Federal credit union must not roll-over any STS 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) STS Loan Program Guidance and Best Practices. In developing a successful STS 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 an STS loan program and enhance member VerDate Mar<15>2010 16:03 Sep 23, 2010 Jkt 220001 benefit include adding a savings component, financial education, reporting of members’ payment of STS loans to credit bureaus, or electronic loan transactions as part of an STS 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 an STS loan program. * * * * * an unsafe condition on an aviation product. The MCAI describes the unsafe condition as: In completing a review of Engine Manual repair/acceptance limits for titanium compressor shafts, Rolls-Royce has found the specified limits to be incorrect such that the shot peened surface layer at life critical features (the axial dovetail slots) may have been inadvertently removed in-service. Removal of the shot peened layer results in increased vulnerability of the part to tensile stresses, which could reduce the life of the shaft to below the published life limits. We are issuing this AD to prevent failure of the intermediate-pressure (IP) and high-pressure (HP) shaft, which could result in an overspeed condition, possible uncontained disc failure and damage to the airplane. DATES: This AD becomes effective October 29, 2010. ADDRESSES: The Docket Operations office is located at Docket Management Facility, U.S. Department of Transportation, 1200 New Jersey Avenue, SE., West Building Ground Floor, Room W12–140, Washington, DC 20590–0001. FOR FURTHER INFORMATION CONTACT: James Lawrence, Aerospace Engineer, Engine Certification Office, FAA, Engine and Propeller Directorate, 12 New England Executive Park, Burlington, MA 01803; e-mail: james.lawrence@faa.gov; telephone (781) 238–7176; fax (781) 238–7199. SUPPLEMENTARY INFORMATION: [FR Doc. 2010–23610 Filed 9–23–10; 8:45 am] Discussion BILLING CODE 7535–01–P We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 to include an AD that would apply to the specified products. That NPRM was published in the Federal Register on April 7, 2010 (75 FR 17630). That NPRM proposed to correct an unsafe condition for the specified products. The MCAI states: DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 39 [Docket No. FAA–2010–0364; Directorate Identifier 2009–NE–27–AD; Amendment 39– 16446; AD 2010–20–11] RIN 2120–AA64 Airworthiness Directives; Rolls-Royce plc RB211 Trent 700 and Trent 800 Series Turbofan Engines Federal Aviation Administration (FAA), DOT. ACTION: Final rule. AGENCY: We are adopting a new airworthiness directive (AD) for the products listed above. This AD results from mandatory continuing airworthiness information (MCAI) issued by an aviation authority of another country to identify and correct SUMMARY: PO 00000 Frm 00006 Fmt 4700 Sfmt 4700 In completing a review of Engine Manual repair/acceptance limits for titanium compressor shafts, Rolls-Royce has found the specified limits to be incorrect such that the shot peened surface layer at life critical features (the axial dovetail slots) may have been inadvertently removed in-service. Removal of the shot peened layer results in increased vulnerability of the part to tensile stresses, which could reduce the life of the shaft to below the published life limits. The acceptable limits for material loss on these surfaces have now been corrected in the Engine Manual. This AD identifies shafts for which such dressing operations have been known to have been carried out and requires that an inspection for compliance with the corrected Engine Manual limits be accomplished and that the shafts be dispositioned accordingly. E:\FR\FM\24SER1.SGM 24SER1

Agencies

[Federal Register Volume 75, Number 185 (Friday, September 24, 2010)]
[Rules and Regulations]
[Pages 58285-58290]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-23610]



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Federal Register / Vol. 75, No. 185 / Friday, September 24, 2010 / 
Rules and Regulations

[[Page 58285]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701

RIN 3133-AD71


Short-Term, Small Amount Loans

Agency: National Credit Union Administration (NCUA).

Action: Final rule.

-----------------------------------------------------------------------

SUMMARY: NCUA is amending its general lending rule to enable Federal 
credit unions (FCUs) to offer short-term, small amount loans (STS 
loans) as a viable alternative to predatory payday loans. The amendment 
permits FCUs to charge a higher interest rate for an STS loan than is 
permitted under the general lending rule, but imposes limitations on 
the permissible term, amount, and fees associated with an STS loan. 
This final rule also requires an FCU to set a cap on the total dollar 
amount of STS loans it will make and to set a length of membership 
requirement of at least one month. Also, any loan under this rule must 
be fully amortized. The STS loan alternative will assist FCUs in 
meeting their mission to promote thrift and meet their members' credit 
needs, particularly the provident needs of members of modest means. 
Permitting a higher interest rate for STS loans will allow FCUs to make 
loans cost effective while the limitations will appropriately constrain 
the product to meeting its purpose as an alternative to predatory 
credit products. This final rule also includes guidance in the form of 
``best practices'' FCUs should consider incorporating into their 
individual STS programs.

DATES: This rule will become effective on October 25, 2010.

FOR FURTHER INFORMATION CONTACT: Justin M. Anderson, Staff Attorney, 
Office of General Counsel, at the above address or telephone (703) 518-
6540.

SUPPLEMENTARY INFORMATION:

A. Background

    The Federal Credit Union Act (the Act) permits FCUs to make loans 
and extend lines of credit to members but prohibits FCUs from charging 
an annual percentage rate (APR), inclusive of all finance charges, 
above 15%. 12 U.S.C. 1757(5)(A)(vi). The Act, however, permits the NCUA 
Board (the Board), after considering certain statutory criteria, to 
establish a higher interest rate ceiling in 18-month cycles. Id. At its 
July 2009 meeting, the Board reapproved an APR ceiling of 18%, 
effective until March 10, 2011. NCUA Letter to Federal Credit Unions 
09-FCU-06 (July 2009).
    The Board reviewed NCUA's regulatory structure and recognized that 
under this current structure many FCUs could not provide their members 
with a reasonable alternative to traditional payday loans. The Board, 
therefore, considered amending its regulations to provide FCUs with a 
regulatory structure under which they could offer a responsible payday 
loan alternative to members in a safe and sound manner.

B. Proposed Rule

    On April 29, 2010, the Board issued a proposed rule amending Sec.  
701.21 to increase the interest rate ceiling for STS loans, provided 
FCUs made the loans within the requirements of the rule. 75 FR 2447 
(May 5, 2010). The Board also specifically asked for comments on the 
issues of amortization, utilizing a 36% APR inclusive of all fees, and 
requiring members to participate in direct deposit or payroll deduct. 
The comment period closed on July 6, 2010. The Board received 33 
comments from: Two credit union trade associations; one bank trade 
association; two private citizens; sixteen credit unions; seven State 
credit union leagues; three consumer advocacy groups; one credit union 
service organization; and one philanthropic foundation. Commenters 
addressed a wide range of issues including the different requirements 
of the rule, those areas where the Board specifically requested 
comment, and other aspects of payday lending that were not related to 
this rule.

C. Summary of Comments

1. General

    While most commenters supported the idea and framework of the rule, 
many commenters offered a suggestion on one or more aspects of the 
proposal. There were, however, three commenters that supported the 
proposed rule as drafted, four that did not support the rule, and one 
that only provided details about its payday alternative program. The 
commenters that supported the rule as written believe the rule would be 
a valuable tool FCUs could use to assist their members, is in line with 
the mission and purpose of the FCU charter, and would provide members 
with a way to safely break the payday loan cycle.
    Of the commenters that did not support the rule, one commenter 
generally opposed the idea of payday lending and believed NCUA should 
monitor and regulate existing programs, rather than help foster an 
alternative. Two other commenters did not believe the terms of the rule 
would be attractive to FCUs or borrowers. Finally, one commenter 
believed credit unions should be permitted to develop their own 
programs instead of NCUA creating one. With respect to the last 
comment, the Board notes this final rule does not prohibit an FCU from 
continuing or participating in a closed or open-end payday loan program 
that operates successfully and legally under NCUA's Regulations and the 
Federal Reserve Board's Regulation Z (Reg Z). 12 CFR Part 226.

2. Specific Comments and NCUA's Response

    The remaining 25 commenters generally supported the rule, but 
offered suggestions on specific aspects of the rule or provided 
comments on the sections where the Board specifically requested 
comments. The Board considered all of the comments and modified the 
final rule where appropriate. The specific comments and NCUA's 
responses are discussed in the following section-by-section analysis.
a. Permissible Interest Rate
    A majority of the commenters believed an interest rate ceiling of 
1000 basis points above the established general interest rate ceiling, 
as set by the Board, was sufficient for FCUs offering an STS product. 
As noted above, the Board set interest rate ceiling is

[[Page 58286]]

currently at 18%. A few other commenters, however, provided alternative 
suggestions for the Board's consideration. Two commenters believed the 
interest rate ceiling for STS loans should be higher to account for the 
higher degree of risk associated with this type of lending, but did not 
provide a specific interest rate they favored. Two other commenters 
believed a 36% all inclusive APR was appropriate, citing a relation to 
the Department of Defense (DOD) regulations and the need to keep costs 
as low as possible for borrowers.
    Two commenters advocated maximum flexibility and believed FCUs 
should be permitted to choose between a 36% all inclusive APR and the 
proposed rate and fee structure. One commenter believed the APR for STS 
loans should be 36% plus a $20 application fee. Other individual 
commenters suggested approaches, such as an 18% APR with a broader 
definition of finance charges, allowing a 28% APR for all legally 
permissible payday programs, and not increasing the APR at all.
    The Board has considered these comments and, based on the reasons 
set forth in the preamble to the proposed rule, has decided to proceed 
with the proposed structure of an APR 1000 basis points above the Board 
approved interest rate ceiling, which currently would be 28%, and a $20 
application fee.
    With respect to the comments on FCUs being able to offer this 
product to members of the military, the Board notes that the definition 
of a payday loan in the DOD regulations would not include most loans 
made under this final rule. The DOD regulations provide the following 
definition of a payday loan:
    (i) Payday loans. Closed-end credit with a term of 91 days or fewer 
in which the amount financed does not exceed $2,000 and the covered 
borrower:
    (A) Receives funds from and incurs interest and/or is charged a fee 
by a creditor, and contemporaneously with the receipt of funds, 
provides a check or other payment instrument to the creditor who agrees 
with the covered borrower not to deposit or present the check or 
payment instrument for more than one day, or;
    (B) Receives funds from and incurs interest and/or is charged a fee 
by a creditor, and contemporaneously with the receipt of funds, 
authorizes the creditor to initiate a debit or debits to the covered 
borrower's deposit account (by electronic fund transfer or remotely 
created check) after one or more days. This provision does not apply to 
any right of a depository institution under statute or common law to 
offset indebtedness against funds on deposit in the event of the 
covered borrower's delinquency or default.

32 CFR 232.2. Under the terms of this final rule, all STS loans will be 
for less than $2,000 and many will have maturities less than 91 days. 
The terms of this final rule, however, do not require an FCU to obtain 
a check or payment instrument or authorization to debit a member's 
account contemporaneously with an extension of credit. Further, NCUA 
does not generally expect FCUs to need to require a check or payment 
instrument and, as discussed below, FCUs are prohibited from 
conditioning the extension of credit on a member's consent for 
electronic debit. An FCU, therefore, will typically be able to offer 
loans under the terms of this rule to members of the military without 
violating the DOD regulations.
b. Loan Term
    Approximately one-third of the commenters submitted comments on the 
proposed permissible loan term. Of those commenters, most believed the 
minimum loan term should be greater than 30 days, with commenters 
citing a range between 90-120 days as an acceptable minimum term. Some 
commenters also believed the maximum loan terms should also be longer, 
citing 12 to 18 months as an acceptable range for the maximum loan 
term. The commenters who advocated for a longer term believed that a 
longer term was necessary to enable borrowers to pay back a loan in 
small, more manageable payments.
    After considering the comments and for the reasons articulated in 
the preamble to the proposed rule, the Board has decided to keep the 
proposed terms of a minimum maturity of one month and a maximum 
maturity of six months. The Board believes this final rule should 
provide a high level of protection for borrowers, and is concerned that 
longer term loans may actually have unintended negative consequences. 
The Board is specifically concerned that borrowers with longer term STS 
loans may continue to use payday lenders to cover expenses that arise 
during repayment. While it is possible that this scenario may also 
occur under the maturity structure in this rule, the Board believes 
loans with maturities between one and six months will provide borrowers 
with frequent enough access to credit to minimize the need for 
additional loans from payday lenders. To effectuate the beneficial 
nature of a one to six month maturity and ensure maximum borrower 
protection, the Board is reaffirming its statement in the preamble to 
the proposed rule that FCUs should structure the terms of an STS loan 
in a way that allows a borrower to repay the loan in the given term. 
NCUA will scrutinize an FCU's program to ensure loans are being made in 
a way that provides a member with the best chance to successfully repay 
a loan made under this rule.
c. Number of Loans and Roll-Overs
    Approximately one-third of the commenters addressed the issues of 
roll-overs and the permissible number of loans. While most commenters 
agreed the final rule should prohibit roll-overs, there were three 
commenters that believed roll-overs could be appropriate in limited 
circumstances. The commenters cited that without roll-overs a borrower 
who cannot pay off the loan within the loan term will incur late fees 
and, possibly, a negative entry on his or her credit report. Also, one 
commenter asked for further clarification of the term ``roll-over'' in 
the final rule.
    After considering these comments, the Board has determined to keep 
the prohibition against roll-overs, but will provide some flexibility 
in the final rule so borrowers can meet their payment obligations 
without incurring additional fees. While the Board continues to 
disagree that roll-overs are ever appropriate, it believes permitting 
FCUs to extend the term of a loan, without any additional fees, may be 
beneficial to both FCUs and borrowers. The prohibition against roll-
overs in this rule applies to situations in which a borrower is charged 
additional fees for extending or ``re-borrowing'' funds to avoid 
delinquency. Under this rule, an FCU may, however, extend the term of 
the loan, within the maximum loan term set by this rule, provided the 
FCU does not charge any additional fees, except interest, or extend any 
additional funds. For example, if a borrower takes out a $300 loan for 
three months and, at some point within those three months, is unable to 
continue making payments, the FCU can extend the loan term for another 
one to three months, but cannot extend any new credit or charge 
additional fees in connection with this extension. The Board believes 
allowing for an extension without any additional fees will provide 
borrowers with the best opportunity to repay the loan and avoid 
delinquencies. NCUA generally expects FCUs, however, to set the term 
and amount of the loan in a way that allows borrowers to repay it 
within the

[[Page 58287]]

term and avoid the need to extend a loan.
    With respect to the number of loans, most commenters believed there 
should be a higher limit on the number of loans a borrower may have in 
a 12-month period or no cap at all. Commenters believed that the number 
imposed in the proposed rule was too limiting and could drive borrowers 
back to payday lenders.
    After considering these comments the Board has determined to 
proceed with the terms in the proposed rule, which limit FCUs to making 
only one loan at a time to a member and no more than three in any 
rolling six-month period. In response to the commenters advocating for 
a higher number of loans, the Board disagrees that a limited number of 
loans will push borrowers back to payday lenders. As noted above, the 
Board intends this rule to provide borrowers with enough access to 
credit to preclude the need for a borrower to also borrow from a payday 
lender. The Board also intends this rule to help borrowers curtail the 
repetitive use of payday loans and transition them to more mainstream 
financial products and more responsible borrowing. A cap of three loans 
in any rolling six-month period coupled with the minimum and maximum 
maturities, set out above, achieves this balance of providing borrowers 
with sufficient access to credit while helping borrowers transition 
from a reliance on repetitive borrowings.
d. Application Fee and Amount of the Loan
    Approximately one-half of the commenters addressed the appropriate 
amount of an application fee. Two commenters believed $20 was an 
appropriate amount but two other commenters felt an application fee 
should be capped at $25. Of the remaining commenters, four believed the 
application fee should be higher, but did not provide a specific amount 
and several commenters believed FCUs should be permitted to set their 
own application fees in accordance with Regulation Z or the application 
fee should be tied to the amount of the loan. All commenters who sought 
a higher application fee cited an increased risk in this type of 
lending. Two commenters believed FCUs should charge a borrower only one 
$20 application fee every six months and two commenters believed the 
Board should not permit FCUs to charge any fees for these loans, 
including application and late fees. All commenters who favored a lower 
fee or no fee cited a minimal underwriting process that does not 
justify a fee.
    After considering the comments, the Board has decided to keep the 
proposed maximum application fee of $20. While the Board agrees that 
this type of lending is inherently riskier than many other types of 
lending, it is interest income and not the application fee that allows 
FCUs to offset the higher degree of risk. The Board notes, Reg Z limits 
application fees to the recovery of costs associated with processing 
applications for credit that are charged to all consumers who apply, 
regardless if credit is actually extended. 12 CFR 226.4(c)(1). For the 
reasons articulated in the preamble to the proposed rule, the Board 
believes a maximum application fee of $20 is sufficient to allow FCUs 
to recoup the costs associated with processing an application for an 
STS loan. With regard to those commenters who argued for a lower 
application fee or a restriction that application fees be charged only 
once in a six-month period, the Board points out that $20 under this 
rule is the maximum amount FCUs can charge for an application fee and 
that FCUs are still bound by the definition of application fee in Reg 
Z. As such, an FCU's application fee can only be the amount needed to 
recoup the actual costs associated with processing an application. If 
an FCU undertakes a more limited application process with repeat 
borrowers, there would be no justification for charging the same 
application fee each time the borrower applied. NCUA will scrutinize 
application fees to ensure FCUs are using the fee to recoup costs 
associated with processing an application and not to account for the 
riskier nature of this type of lending.
    On the issue of the permissible amount of a loan, slightly less 
than one-half of the commenters provided suggestions. A majority of the 
commenters believed the minimum loan amount should be less than $200, 
citing a high demand for loans between $50 and $100. One commenter 
believed the minimum loan amount was acceptable, but the maximum loan 
amount should be $2,500. Finally, one commenter believed that the 
maximum amount should be lowered because most payday borrowers cannot 
pay back $1,000, even over a six-month period.
    The Board believes the proposed minimum loan amount of $200 and the 
proposed maximum amount of $1000 are appropriate and has included these 
amounts in the final rule. With respect to those commenters who 
advocated for a lower minimum amount, the Board notes, as discussed 
above, that this rule does not prohibit FCUs from making smaller loans 
that are legal under NCUA's regulations and Reg Z. Also, as noted in 
the preamble to the proposed rule, a minimum loan amount of $200 is in-
line with the typical loan extended to payday loan borrowers.
    In response to the commenter who argued that the maximum loan 
amount should be $2,500, the Board does not believe it would be prudent 
to allow FCUs to lend amounts over $1,000 to borrowers at terms of six 
months or less. As noted in the preamble to the proposed rule, the 
Board chose a maximum loan amount of $1,000 because it may allow 
borrowers to repay loans from payday lenders and transition to more 
traditional FCU products while still being a manageable short-term 
loan.
    Finally, in response to the comment that most borrowers could not 
pay back $1,000 in six months and, therefore, the maximum amount should 
be lower, the Board notes the discussion above regarding the impetus 
for a maximum loan of $1,000. In addition, as discussed earlier in this 
preamble, the Board expects FCUs to extend loans to borrowers in 
amounts and under terms in which the borrower can manage repayment of 
the loan, within the confines of this rule.
e. Amortization and Length of Membership Requirements
    In response to the Board's specific request for comment on the 
issue of amortization, approximately one-third of the commenters 
provided a response. The majority of those commenters believed that the 
final rule should require FCUs to fully amortize STS loans. There were 
two commenters, however, that believed FCUs should have the option to 
use balloon payments, citing that, in limited circumstances, balloon 
payments may actually benefit members.
    The Board agrees with the majority of the commenters that FCUs 
should fully amortize loans made under this rule, and is including a 
specific requirement in the final rule. The Board notes that balloon 
payments often create additional difficulty for borrowers trying to 
repay their loans, and requiring FCUs to fully amortize the loans will 
allow borrowers to make manageable payments over the term of the loan, 
rather than trying to make one large payment. Under the requirement to 
amortize a loan, FCUs must structure the payments so that the borrower 
is paying a portion of the principal and interest in equal or near-
equal installments on a periodic basis over the course of the loan. 
While the Board is not prescribing specific payment schedules, i.e., 
monthly or bi-weekly,

[[Page 58288]]

FCUs should offer payment schedules that allow borrowers to easily 
repay the loan within the given term.
    Approximately one-quarter of the commenters addressed the issue of 
a length of membership requirement. Of those commenters, all but one 
believed FCUs should have the option to impose a length of membership 
requirement, but that it should not be a regulatory requirement. The 
Board disagrees that FCUs should have the option of setting a length of 
membership requirement and has included a requirement in the final rule 
that FCUs set a length of minimum membership requirement of at least 
one month. The Board wants to provide FCUs with as much flexibility as 
possible in developing an STS loan program, but it must consider the 
riskier nature of this type of loan and the safety and soundness of the 
FCUs offering them. The Board believes a minimum membership requirement 
of one month will build a meaningful relationship between the borrower 
and the FCU and help reduce the chance of a borrower defaulting on an 
STS loan. While the final rule imposes a minimum requirement of one 
month, individual FCUs should evaluate their risk tolerance and set a 
membership requirement accordingly.
f. Lending Cap and Payroll Deduct/Direct Deposit
    Less than a quarter of the commenters addressed the issue of a 
lending cap. Of those commenters, there was an even split between the 
number of commenters that believed NCUA should impose a cap and those 
that believed the Board should permit FCUs to set their own cap. The 
Board received three suggestions on how to establish a cap: Setting a 
cap at 20% of net worth; 5-10% of assets; and a cap only on the dollar 
amount of total loans made as a percentage of net worth.
    After considering these comments, the Board has decided to require 
FCUs to set a cap in their written lending policies on the aggregate 
dollar amount of loans outstanding not to exceed 20% of total net 
worth. While the Board believes it is preferential to allow an FCU to 
evaluate its own risk tolerance and resources in setting a cap, the 
Board also wants to provide FCUs with a ceiling to ensure any cap set 
by an FCU is sufficient from a safety and soundness perspective. The 
Board believes a cap on the aggregate dollar amount with a ceiling of 
20% net worth will be sufficient to ensure FCUs are not exposed to 
unnecessary risks and their resources are not stretched. Depending on 
the success of these programs, the Board can consider raising the cap 
ceiling at a later date.
    Over half of the commenters addressed the issue of requiring credit 
unions to provide STS loans only to members that had direct deposit or 
authorized payroll deduction. Of those commenters, nearly three-
quarters believed FCUs should have the option to require direct deposit 
or payroll deduct as part of their program, but it should not be a 
regulatory requirement. One commenter believed it should be a 
regulatory requirement and three believed the rule should specifically 
prohibit the practices. One of the commenters that believed the rule 
should prohibit the practices stated that requiring payroll deduct to 
obtain a loan was prohibited by the Federal Reserve Board's Regulation 
E.
    The Board agrees with a majority of the commenters that direct 
deposit and payroll deduct for members should not be regulatory 
requirements. While the Board believes direct deposit is a useful tool 
for limiting risk, it recognizes that a regulatory requirement may 
restrict FCUs from offering STS loans to members who may not have 
access to direct deposit. Rather, the Board believes an FCU should be 
able to evaluate its risk tolerance and members' needs in determining 
whether or not to require members to participate in direct deposit in 
order to borrow an STS loan.
    On the issue of payroll deduct, the Board notes that Regulation E 
prohibits financial institutions, including FCUs, from conditioning an 
extension of credit to a consumer on the consumer's repayment by 
preauthorized electronic fund transfers. 12 CFR 205.10(e)(1). However, 
under Regulation E, FCUs can offer members a lower rate or other 
incentives if they participate in payroll deduct. 12 CFR Part 205, 
Supplement I, 205.10(e)(1). The Board believes that payroll deduction 
is an important tool for FCUs to utilize in lowering the risk 
associated with these loans. Based on these considerations, the Board 
will let individual FCUs decide if they wish to provide an incentive to 
or encourage members to utilize payroll deduct or other pre-authorized 
electronic fund transfers, but will not include any regulatory 
requirement. The Board is also modifying the best practices section in 
the final rule to reflect these legal considerations regarding payroll 
deduction.
g. Underwriting and Best Practices
    In addition to comments on the specific requirements of the rule, 
the Board also received a few comments requesting that it not require 
specific underwriting criteria in the regulation and also not change 
the best practices section into regulatory requirements. With regard to 
underwriting, the Board will proceed with the approach in the proposed 
rule that an FCU is required to establish underwriting standards in its 
written lending policies, but the Board will not require specific 
standards. The Board believes an FCU is in the best position to 
evaluate the needs of its members and its risk tolerance and set 
appropriate underwriting standards. The Board will also keep the 
underwriting in the best practices section to provide FCUs with 
guidance on how to structure underwriting for STS loans. With respect 
to the best practice section, the Board will keep the approach in the 
proposed rule and offer this section as guidance and not as a 
regulatory requirement. While the Board believes the suggestions in the 
best practices section may be beneficial to FCUs and members, the Board 
also believes an FCU should have flexibility to determine the features 
of its own program.
h. Other Comments
    In addition to the comments addressed above, the Board received 
several comments that did not address specific features of the rule, 
but warrant a discussion in this preamble. Several commenters asked 
NCUA to collect data about STS loans under this rule and reevaluate the 
requirements in a year. The Board agrees with these commenters and will 
modify the 5300 call report by January 2011 to include new sections to 
evaluate loan programs under this rule. One year from the effective 
date of this final rule the Board will evaluate the data collected on 
the 5300 call report and reevaluate the requirements in the final rule.
    There were also several commenters that urged NCUA to take 
enforcement actions against FCUs that are offering predatory payday 
lending products. The Board notes that NCUA staff will continue to 
investigate programs that may be predatory in nature and take action 
where appropriate.

D. Dodd-Frank Wall Street Reform and Consumer Protection Act (The Dodd-
Frank Act)

    The Dodd-Frank Act, signed into law by President Obama on July 21, 
2010, includes, as Title XII, the Improving Access to Mainstream 
Financial Institutions Act of 2010 (Title XII). Title XII includes, 
among other things, Federal assistance to Federally-insured financial 
institutions that are providing small-dollar value loans. Specifically, 
Sec.  1205 of Title XII authorizes the

[[Page 58289]]

Secretary of the Treasury to establish multi-year demonstration 
programs by means of grants, cooperative agreements, financial agency 
agreements, and similar contracts or undertakings with eligible 
entities to provide low-cost, small loans to consumers that will 
provide alternatives to more costly small dollar loans. The Dodd-Frank 
Wall Street Reform and Consumer Protection Act, Public Law 111-203, 
Sec.  1205 (2010). Institutions participating in programs under this 
section are required to promote and provide financial education and 
literacy to small-dollar loan borrowers.
    In addition, section 1206 amends the Community Development Banking 
and Financial Institutions Act of 1994 by requiring the Community 
Development Fund (the Fund) to make grants to community development 
financial institutions (CDFIs) and to any other Federally insured 
depository institution with a primary mission to serve targeted 
investment areas to enable such institutions to establish a loan-loss 
reserve fund to defray the costs of a small dollar loan program 
established or maintained by such institution. Id. at section 
1206(a)(1). Institutions accepting grants under this section are 
required to provide non-Federal matching funds in an amount equal to 
50% of the grant. This section also requires the Fund to make technical 
assistance grants to be used for technology, staff support, and other 
costs associated with establishing a small-dollar loan program. To 
receive a grant or technical assistance grant under this section, a 
financial institution must have or establish a program with loans under 
$2,500 that are paid in installments with no pre-payment penalties, and 
the institution must report payments of the loan to at least one 
consumer reporting agency and meet any other affordability requirements 
established by the Administrator of the Fund. Id. at section 1206(b). 
Title XII also grants the Secretary of the Treasury the authority to 
issue regulations implementing and administering the grants and 
programs discussed in Title XII. Id. at section 1209.
    The Board would like to clarify that the requirements of this final 
rule will not prohibit an FCU, which is otherwise eligible, from 
receiving a grant or participating in a program under Title XII. The 
requirements and best practices guidance in the final rule are in line 
with the requirements imposed by Title XII on participating financial 
institutions. FCUs will be able to comply with the requirements of the 
final rule to take advantage of the higher interest rate and still be 
within the limitations of Title XII.
    As discussed above, the Secretary of the Treasury has the authority 
to issue regulations implementing Title XII and the Administrator of 
the Fund can impose other affordability requirements for grants. The 
Board will review any regulations or requirements related to the Title 
XII grants and programs and compare them to the requirements in the 
final rule to ensure FCUs with STS loan programs can continue to take 
advantage of the benefits included in Title XII.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a proposed rule may have on 
a substantial number of small credit unions (those under $10 million in 
assets). This final rule increases the interest rate ceiling for STS 
loans and sets out several STS loan program requirements an FCU must 
meet to take advantage of the higher interest rates. The final rule 
will not have a significant economic impact on a substantial number of 
small credit unions, and, therefore, a regulatory flexibility analysis 
is not required.

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act (SBREFA) of 
1996, Public Law 104-121, provides generally for congressional review 
of agency rules. A reporting requirement is triggered in instances 
where NCUA issues a final rule as defined by Section 551 of the 
Administrative Procedures Act. 5 U.S.C. 551. The Office of Information 
and Regulatory Affairs, an office within OMB, is currently reviewing 
this rule, and NCUA anticipates it will determine that, for purposes of 
SBREFA, this is not a major rule.

Paperwork Reduction Act

    This rule adds a requirement that Federal credit unions establish a 
cap on short-term, small-dollar loans in their general written lending 
policies, which Federal credit unions are already required to maintain 
and is currently approved under the Paperwork Reduction Act control 
number 3133-0139. NCUA has determined that the requirements of this 
rule are additions to an FCU's customary business records and do not 
increase the paperwork requirements under the Paperwork Reduction Act 
of 1995 and regulations of the Office of Management and Budget.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on State and local interests. In 
adherence to fundamental federalism principles, NCUA, an independent 
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies 
with the executive order. The final rule will not have substantial 
direct effects on the States, on the connection between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government. NCUA has 
determined that this final rule does not constitute a policy that has 
federalism implications for purposes of the executive order.

The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    NCUA has determined that this final rule would not affect family 
well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Public Law 105-277, 112 
Stat. 2681 (1998).

List of Subjects in 12 CFR Part 701.

    Credit unions, Federal credit unions.


    By the National Credit Union Administration Board on September 
16, 2010.
Mary Rupp,
Secretary of the Board.

0
For the reasons discussed above, the National Credit Union 
Administration is amending 12 CFR chapter VI as set forth below:

PART 701--ORGANIZATION AND OPERATIONS OF FEDERAL CREDIT UNIONS

0
1. The authority citation for part 701 continues to read as follows:

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 
1761b, 766, 1767, 1782, 1784, 1787, 1789. Section 701.6 is also 
authorized by 15 U.S.C. 3717. Section 701.31 is also authorized by 
15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610. Section 701.35 
is also authorized by 42 U.S.C. 4311-4312.


0
2. In Sec.  701.21 add paragraph (c)(7)(iii) to read as follows:


Sec.  701.21  Loans to members and lines of credit to members.

* * * * *
    (c) * * *

[[Page 58290]]

    (7) * * *
    (iii) Short-term, small amount Loans (STS loans). (A) 
Notwithstanding the provisions in Sec.  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 STS 
loans in any rolling six-month period to any one borrower and makes no 
more than one short-term, small amount loan at a time to a borrower;
    (4) The Federal credit union must not roll-over any STS 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) STS Loan Program Guidance and Best Practices. In developing a 
successful STS 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 an STS loan program and enhance member benefit include 
adding a savings component, financial education, reporting of members' 
payment of STS loans to credit bureaus, or electronic loan transactions 
as part of an STS 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 an STS loan program.
* * * * *

[FR Doc. 2010-23610 Filed 9-23-10; 8:45 am]
BILLING CODE 7535-01-P