Short-term credit products from credit unions must be more inclusive, NCUA says
There's no doubt that short-term credit products, ranging from loans to prepaid credit cards, have considerable value to the hardworking Americans who are underbanked or unbanked due to their lack (or limited use) of traditional financial services. The Center for Financial Services Innovation found these loans were the most popular form of financing among the financially underserved in 2017. Federal credit unions are arguably the most conventional institutions offering these products, through the PAL loan program established in 2010 by the National Credit Union Administration.
"Short-term credit is immensely important to the underbanked and unbanked."
While PAL loans are generally regarded as a superior alternative credit product, due to their relatively low cost and limited restriction, the NCUA just announced its intentions to devise another short-term loan category that would allow borrowers even greater flexibility. These financial products could have notable impact on businesses and lenders alike.
New loan rules would eliminate minimums, restrict term lengths
According to the Credit Union Journal, the new NCUA loan would eliminate or change conditions for borrowers and lenders alike. Most relevant for individual borrowers is the loans' proposed term limit - 12 months. Also, the maximum amount for these loans would be $2,000, with no minimum amount. PALs, by comparison, have a minimum of $200 and a maximum of $1,000, with a term no shorter than one month and no longer than six. Finally, borrowers could in theory apply for these loans at any time, as opposed to the one-month membership stipulation attached to PALs.
Credit unions, meanwhile, wouldn't be limited in the number of these loans they could issue during a given six-month period. The only restriction that might come into play is a rule against offering additional financing to borrowers who already have outstanding loans.
Competition on the horizon
When standards at traditional lenders became much narrower after the global financial crisis, a large swath of alternative lenders and fintech firms moved in to take advantage of the opportunity. At some extent, PALs represent an attempt by credit unions to siphon business from alternative lending institutions, and so would these new loans.
Regulatory authorities are becoming involved, with the Office of the Comptroller of the Currency recommending banks offer smaller loans to borrowers who lack high traditional credit scores, according to American Banker. But regardless of motivation, if finalized, the new NCUA program will undeniably represent valuable new lending opportunities to borrowers who have reasonable financial sense despite what thief FICO scores might be.