Credit Unions and Payday Loans Regulation |
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It's important to distinguish payday loans from check cashing. Generally, businesses that offer check cashing for a fee do not fall into the category of lenders. While check cashing provides consumers with the same quick access to cash as in the case of payday loans, there only an exchange of money and no process of lending. Payday loans are meant for those with limited means or those who can't qualify for the other major forms of credit. Payday loans can be used by credit unions, struggling for loan growth or fee income. It is especially useful for those who need short-term financing. And the credit union can equip itself to meet this demand. A variety of programs, like cash-advance loans, postdated check loans, deferred deposit loans, and deferred check loans, fall into the category of payday loans. Usually, payday loans transactions are cash advances made in exchange for the consumer's personal check or authorization to debit the consumer's account in the near future. It is based on the understanding that there is not enough cash in the account to cover the advance. But funds are expected soon, i.e. by the next payday. Thus, the lender agrees not to cash or deposit the borrower's check or initiate the debit until the date agreed on. This service is rendered at a price. Consumers pay a fee in addition to the payday loans advance. And on maturity (payday), the consumer's check will be cashed or deposited, or a debit initiated to repay the obligation. The lender may also allow the consumer to make the repayment in cash. If this is the case, he returns the check to the consumer on payment of the amount. Most states provide some form of regulation of both check cashers and payday lenders. A growth in check cashing services and payday loans is usually accompanied by a corresponding growth in state regulation. But in the case of credit unions, the regulation of payday lending activities will depend on the characteristics of the payday loans, particularly the pricing. All credit unions have the authority to make short-term consumer loans. In fact, many argue that this was the original purpose of credit unions. Credit unions also have the authority to establish repayment and security terms that they think are appropriate. So whether transactions are based on held or postdated checks, deferred deposits, or debits, payday loans generally falls within the credit unions' consumer loan authority. Their only critical limitation is pricing. Federal credit unions are limited to charging interest rates of no more than 18% per annum on any loan, while the State-chartered credit unions, even under a federal parity power or most-favored lender doctrine, are limited to 18% or less. It is difficult of stay below 18% in an ordinary payday loan. For example, payday loans of $400 for 20 days usually have a $50 cash-advance fee, an annual percentage rate of 228%. This puts credit unions at a disadvantage with competitors who can charge a higher price to compensate for the risk of such loans. Nor is this dilemma solved by different pricing components, such as cash-advance fees or check-cashing charges. Instead, credit unions blocked by usury limits may consider forming a credit union service organization (CUSO) to offer payday loans with a higher risk-based pricing. Many state credit union acts permit a CUSO to engage in the same activities as credit unions, including short-term consumer lending. But under the CUSO there are several issues, like whether payday lending is a permissible activity. And if it is, then what state consumer finance licensing and regulations will apply. CUSOs must, then, carefully review state law limitations in handling checks. Some states don't permit loans on postdated checks or deferred presentment arrangements. Similarly, payday loans extensions could constitute loan financing, which many states prohibit. For the federal credit unions, forming a CUSO is the not an option. Meanwhile, the National Credit Union Administration doesn't include consumer lending in its list of activities, permissible for a CUSO. The State-chartered credit unions, however has broader authority. But CUSOs have authority to engage in consumer lending, as long as the interest rate for payday loans do not exceed a state usury limit. But it may still need to obtain a consumer finance or small loan company license. And for these licenses, background investigations of financial responsibility, experience and character fitness, and bonding are generally necessary requirements. |
