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Short term loans secondary capital approved by NCUA
ALEXANDRIA, Va. (9/17/10)—The National Credit Union Administration (NCUA) on Thursday made final a pair of interim final rules that altered Part 701 of NCUA regulations. The board approved a rule that would allow federal credit unions to offer short-term, small amount (STS) loans to their members. The loans are meant to serve as an alternative to predatory payday loans that are offered by other financial service providers. The rule, which requires the individual receiving the loan to be a member of the lending credit union for at least one month, could also potentially bring the unbanked into the credit union system. The final rule permits federal credit unions to charge an interest rate that is a maximum of 10 percentage points above the established usury ceiling at that time. The current federal credit union usury ceiling is 18%, and the final rule would therefore allow federal credit unions to charge 28% interest on STS loans. A $20 application fee may also be charged. The rule would impose limitations on the permissible term, amount, and fees for these types of loans, and would not permit lenders to roll over any of these short-term loans. However, the NCUA has amended the final rule to allow lenders to extend the term of some loans by as much as six months if the member is having trouble paying back the loan within its original timeframe. Federal credit unions may set a cap on the total monetary amount of STS loans granted to members, and will not be permitted to require loan payment via member payroll deduction. The STS rule is not the only way that federal credit unions can lawfully offer payday loan alternatives. Federal credit unions may, now or in the future, also offer short-term loan products with different qualities, so long as those loans' terms comply with Regulation Z and NCUA rules (other than the new STS rule). The interest rate on such loans, however, would be limited to no more than the 18% that is allowed by the generally applicable, federal credit union usury ceiling. The NCUA also approved an interim final rule that permitted low-income designated credit unions to redeem all or part of government-funded secondary capital, along with matching secondary capital, “at any time after it has been on deposit for two years.”
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