What Are the Regulatory Implications of Implementing a Small-Dollar Loan Program?

Small-dollar loans offered by credit unions have taken a prominent role in financial newsfeeds lately. Regulatory agencies are giving Payday Loan Alternative Programs (PAL programs) another look. In this blog, we’ll briefly explore the implications of the changing regulatory landscape with respect to credit union quick loans.

The small-dollar lending industry hasn’t received much good press in the last several years. The culprits tend to be predatory check-cashing centers and payday loan shops, most of whom levy exorbitant interest rates on their short-term loans. In some cases, these lenders charge between 300-800% APR for quick loans, which contributes to a cycle of debt and financial instability to the vulnerable people who need them.

However, more responsible lenders have been entering the Payday Loan Alternative Program marketplace. Lenders such as community banks and credit unions are offering small-dollar loans at a fraction of the interest rates charged by predatory lenders. Consequently, regulatory agencies are reconsidering their stance on quick loan regulations.

Who’s Changing Their Tune

Currently, there are a few major regulatory agencies changing their approach to payday loan alternative programs by reputable financial institutions. These include:

  • The CFPB: The Consumer Financial Protection Bureau
  • The OCC: The Office of the Comptroller of the Currency
  • The NCUA: The National Credit Union Association
  • The FDIC: The Federal Deposit Insurance Corporation

All the above listed agencies are investigating or introducing new regulations regarding financial institutions entering the small-dollar loan marketplace. Most agencies are looking to reduce strict lending measures or practices to make it easier for larger, more reputable financial institutions to provide short-term lending solutions to their members or customers.

What this means for credit unions is that while regulatory change is sure to come, it looks favorable for the future of small-dollar loan programs.

Why Credit Unions Should Pay Attention

With several regulatory bodies addressing the responsible deployment of Payday Lending Alternative Programs, credit unions should consider what small-dollar loans can accomplish for them.

1.    Serving members while protecting them from predatory lenders

The most important consideration for credit unions is their members. Credit union members come from varying economic backgrounds and have differing financial needs. However, members with less earning potential tend to be the most financially vulnerable and are more likely to require an emergency loan to cover unexpected costs such as car trouble, medical debt, loss of income, or a traffic ticket.

Credit unions who care about their members’ financial health and viability should consider implementing a small-dollar loan program. Any members experiencing significant loss of income would be much better served by a responsible, low-interest Payday Loan Alternative Program from their credit union. Otherwise, they’ll be more likely to incur further trouble and debt from nearby predatory lenders.

2.    Increase loan margins

Lower-income and financially-vulnerable members are less likely to take out auto and home loans, and so they aren’t usually as profitable for credit unions.

However, small-dollar loans increase the profitability of lower-income members. Furthermore, it does so without jeopardizing members’ long-term financial viability, because credit unions lend responsibly and look out for their members’ best interests.

Business Law Concept Background as a Abstract

Member Services vs Regulatory Changes

Credit unions who wish to implement Payday Lending Alternative Programs have a few things to keep track of if they want to be successful. Credit union small-dollar loan programs must be designed to match the following:

  • Credit union market needs
  • Member needs
  • The greater competitive marketplace

At the end of the day, credit unions should deliver a quick lending solution that not only serves the members, but also creates margin and fits into broader marketplace trends.

Next Moves for Credit Unions

The FDIC is opening a comment period on the way they should deliver small-dollar loans in the marketplace. Now is the time to follow news and developments in Payday Alternative Lending Programs and, if you have relevant input, to share it.

If you’d like to learn more about how credit unions can easily implement small-dollar loan programs, follow the links below. Or, if you’d like to see how small-dollar loans can benefit your members when they need it most, download our Member Crisis Guide.


 What are the Most Common Reasons Credit Union Members Use Small Dollar Loans?

How Do Most Credit Unions Currently Offer Small-Dollar Loans

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