The full-payment test requires the lender to verify the borrower’s income (after taxes), borrowing history (credit report check), and certain other key obligations the borrower may have (including basic living expenses such as food, rent and medical costs). The lender must determine whether the borrower will have the ability to repay the loan in full and satisfy their other major financial obligations without re-borrowing. This ability-to-pay review extends for the term of the loan and for 30 days after the loan has been paid off.
Lenders can use an alternative method-the principal payoff option-when they do not want to conduct income verification and the loan meets certain requirements. These requirements include a loan limit of $500, a loan structure that is designed to keep the consumer from getting trapped and the elimination of auto-title collateral or open-end credit lines. For this option, the borrower cannot have any other outstanding short-term or balloon-payment loans or cannot have been in debt on a short-term loan for 90 days or more over the preceding 12 months.
When extending installment loans, lenders can either conduct the same full-payment test required for short-term loans, or they have two other options available. One option is to offer loan products that meet the National Credit Union Administration’s (NCUA’s) “payday alternative loans” (PAL) guidelines. Alternatively, lenders can extend loans that are repayable in roughly equal installment payments for a term not to exceed two years and that have an all-in APR of 36 percent or less not including a reasonable origination fee. Lenders that offer this second option are also required to maintain an annual default rate under 5 percent on these types of loans and are subject to an origination fee repayment penalty for any year in which they exceed the 5-percent rule.
Credit Union PAL Products
Many credit unions already offer affordable small-dollar loan products to their members. These lending guidelines include a maximum loan amount limit of $1000 and application fee of $20, as well as a maximum 28 percent ortization and membership requirements. These small-dollar loan options have not entirely eliminated credit unions members’ use of payday loan products, but they have provided a viable alternative and a means by which many consumers are able to lift themselves out of payday loan debt.
Payday Loan Alternatives: An Expanding Marketplace While federal regulation of payday lending and other small-dollar loan products will provide much-needed oversight and protection for consumers, the CFPB rules alone cannot address all the challenges facing LMI individuals in obtaining access to credit
Table 1 shows the structure, requirements and results of the Greater El payday loans in Hawaii Paso Credit Union’s (GECU’s) Fast Cash program. After determining that many of its members were using payday loans as a means to supplement their monthly income, GECU created Fast Cash as a payday loan alternative that their members could easily access to receive a small-dollar loan within minutes. The program has achieved overwhelming success and enabled many credit union members to eliminate their payday loan debt and improve their overall credit profiles.
Refinances of single payment loans in Houston have remained the largest source of revenue overall, and fees, while slightly declining, have remained the largest revenue generator for longer-term loan products.
The CFPB-proposed rules divide covered loans into two categories: short-term and longer-term loans. Short-term loans include products that are typically due on the borrower’s next payday as well as single-payment auto title loans. For these loans, lenders have the option of conducting a full-payment test or structuring the loan in a way that prevents the borrower from becoming trapped in debt.
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