Section (c)(7)(iii)(A)(3) limits the number of PALs I loans that an FCU can make to three in a rolling 6-month period to any one borrower.
To account for the adoption of the PALs II rule, the final rule amends this section to clarify that an FCU may not offer more than one PALs loan, whether a PALs I or PALs II loan, to a borrower at a time
Some commenters argued that the limitation on the number of PALs loans that a borrower may receive at a given time would force borrowers to take out a payday loan if the borrower needs additional funds. However, the Board believes that this limitation places a meaningful restraint on the ability of a borrower to take out multiple PALs loans at an FCU, which could jeopardize the borrower’s ability to repay each of these loans. While a pattern of repeated or multiple borrowings may be common in the payday lending industry, the Board believes that allowing FCUs to engage in such a practice would defeat one of the purposes of PALs loans, which is to provide borrowers with a pathway towards mainstream financial products and services offered by credit unions.
Section (c)(7)(iii)(A)(7) permits an FCU to charge a reasonable application fee, not to exceed $20, to all members applying for a PALs I loan. The Board interprets the term “application fee,” as used in the PALs I rule, consistently with that of the CFPB’s Regulation Z. Accordingly, in order to qualify as an “application fee” under the PALs I rule, an FCU must use the charge to recover actual costs associated with processing an individual application for credit such as credit reports, credit investigations, and appraisals. An application fee that exceeds the actual cost of processing a borrower’s application is a finance charge under Regulation Z that must be included in the APR and measured against the usury ceiling in the NCUA’s rules.
In response to the PALs his response II NPRM, several commenters argued that the current application fee limit of $20 is too low to allow an FCU to recover the actual costs of processing applications. The majority of these commenters recommended that the Board set the application fee limit between $40 and $50 to create an incentive for more FCUs to offer PALs loans to their members. Because of the limited underwriting involved with a PALs loan, the Board does not believe that an Start Printed Page 51946 application fee limit between $40 and $50 is appropriate. While one commenter provided a revenue model to help illustrate the potential cost of making a PALs loan, a majority of the commenters have not provided sufficient data to support their conclusion that the $20 application fee limit is too low to allow any FCU to recover the actual costs of processing applications.
Other commenters asked the Board to clarify whether an application fee may reflect staff and technology costs, investing in loan processing automation, third-party service provider costs, and advertising. As noted above, the Board interprets the term “application fee” in the PALs I rule consistently with Regulation Z. An application fee must reflect the actual and direct costs associated with processing an individual application. While certain third-party service provider costs may be included in the application fee, especially if the FCU offers a PALs loan through a third-party vendor and passes any costs associated with using that vendor onto the member borrower, the Board does not believe that other costs, such as investing in loan processing automation or advertising costs, are actual and direct costs associated with processing a borrower’s application. Rather, these costs are general business expenses incurred as part of credit union operations and do not relate to costs specifically incurred processing a borrower’s PALs loan application.