Five credit union associations, including CUNA and NAFCU are calling on the U.S. Department of Defense to exempt CUs from proposed changes in the Military Lending Act that would impose a 36% cap on the military annual percentage rate of interest for consumer credit products.
The other credit union associations are: the African-American Credit Union Coalition (AACUC), Defense Credit Union Council (DCUC); and National Association of State Credit Union Supervisors (NASCUS).
"The increased costs and unintended consequences of the proposal, especially on smaller credit unions, could negatively impact the delivery of high-quality reasonably- priced financial products and services to our troops," the groups wrote in a joint comment letter to the Federal Docket Management Systems. "Any changes to the current rules should curtail and eliminate the unscrupulous business practices of organizations targeting our military personnel—and not harm credit unions that are dedicated to the financial well-being of their member-owners."
The letter also noted that existing DoD rules on consumer credit for service members and their dependents — in place since 2007 — have been "an effective tool in protecting military consumers and curbing many abusive practices."
The exemption should rest on the fact that CU are not the perpetrators of abuses which the DoD is seeking to curb through its MLA rule, the letter stated, adding: "Credit unions should be exempt due to the highly regulated and relatively limited nature of their operations."
The MLA rule change would also further boost already high compliance costs, the group wrote.
The letter calls for the DoD to exempt NCUA's payday alternative loans (PALs) from the proposed changes, since the PAL program is a "product offered by federal credit unions that will likely be directly affected by the proposed rule," according to the letter.
Late last week NCUA chairman Debbie Matz called for an exemption of the PAL program from the proposed rule changes. "PALs serve as a viable alternative to predatory payday loans and can help members avoid or end dependency on those loans," Matz wrote in her comment letter.
Under NCUA's current regulations, federally insured credit unions can offer PALs with a rate cap of 1000 basis points above the 18-percent general rate cap for credit unions (i.e., 28%) and an application fee of up to $20.
"If these regulations are revised to cover payday alternative loans, the rate and fee for many payday alternative loans would be higher than the military APR cap," Matz stated.
NCUA also warned that DoD's proposed rule would cover other types of consumer credit, including credit card accounts and overdraft lines of credit with a finance charge.
"As with payday alternative loans, the combined interest rates and fees for some of these products could exceed the 36-percent military APR cap, even if the interest rate is below the general 18-percent rate cap for federal credit unions," NCUA advised.
As Credit Union Journal has reported, about 500 federal credit unions offer PALs. System-wide, these federal credit unions have about $23 million in outstanding loans, with an average loan balance of $382. However, some leading politicians support the proposed rule changes to MLA.
Last month, a group of U.S. senators, led by Mark Warner and Tim Kaine, both Virginia Democrats, wrote a letter to the DoD saying that the proposed changes would help protect military service-members and their families from predatory and abusive lenders.
"As our service-members are asked to take on even more tasks in defense of our nation, we should take every opportunity to protect them and their families here at home, especially from unscrupulous lenders," the senators wrote. "We strongly support the proposed MLA rule and urge that the final MLA rule be similarly robust in enhancing protections for service-members and their families, producing significant cost savings for DOD, and improving military readiness."
The signatories of the letter included every Democratic member of the Senate Armed Services Committee.
The DoD is expected to make a decision on the exemption in May.