September 25, 2012
With the National Credit Union Administration (NCUA) having just released proposed changes to the short-term, small-amount loan (STS) program, it is good to review the current requirements of the program. STS loans allow federal credit unions to offer a viable alternative to predatory payday lending.
What are the requirements for federal credit unions offering STS loans to their members?
- STS loans may have an interest rate of no more than 1,000 basis points above the maximum interest rate established by the NCUA board of directors. The current maximum allowed by the board is an annual percentage rate (APR) of 18 percent. This means an STS loan may have an effective annual rate of no more than 28 percent APR. If the board allows the maximum rate to go back to the 15 percent APR per 12 CFR 701.21, then the maximum effective annual rate on STS loans will be 25 percent APR.
- The principal of the STS loan cannot be less than $200 or more than $1,000.
- The STS loan must have a minimum maturity of one month and a maximum maturity of six months.
- A federal credit union can provide no more than three STS loans to any one member during a rolling six-month period.
- A member may only have one STS loan at a time.
- A federal credit union must not roll-over any STS loan. The federal credit union may extend the loan to the maximum term but may not charge a fee for doing so.
- A federal credit union must fully amortize the loan.
- A federal credit union must establish a minimum length of credit union membership of at least one month in order to qualify for the STS loan.
- A federal credit union may charge an application fee to all members applying for the loan, but the fee must reflect the actual costs associated with processing the application and cannot exceed $20.
- A federal credit union must update its written lending policies to include STS loans and a limit on the aggregate dollar amount of STS loans to a maximum of 20 percent of net worth. In addition, the federal credit union must implement appropriate underwriting guidelines to minimize risk.
What are the NCUA-suggested best practices for short-term loans?
To enhance credit unions’ STS programs, the NCUA suggests adding a savings component, reporting payment to credit bureaus, adding a financial education piece and encouraging members to utilize payroll deduction in repaying the loans.
As far as underwriting, the NCUA encourages credit unions to balance the member’s need for quickly available funds while adhering to principles of responsible lending. The underwriting standards should address required documentation for proof of employment or income, such as at least two recent pay stubs.
The NCUA also suggests that for members who are established with the credit union, the only necessary underwriting should be a review of the account to determine that the member is in good standing and for proof of recurring income or employment.
Finally, credit unions should attempt to avoid or minimize risk wherever possible. Two suggestions were to restrict short-term loans to only those members who have direct deposit and to conduct a thorough review of the credit union’s position and ability to safely offer this kind of lending.
Questions? Contact the Compliance Hotline: 1.800.546.4465, firstname.lastname@example.org.