Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Proposed Rules 24497 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Part 701 

RIN 3133–AD71 

Short-Term, Small Amount Loans 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Proposed rule. 

SUMMARY: NCUA proposes to amend its 

general lending rule to enable federal 

credit unions (FCUs) to offer short-term, 

small amount loans (STS loans) as a 

viable alternative to predatory payday 

loans. The proposed amendment would 

permit FCUs to charge a higher interest 

rate for an STS loan than is permitted 

under the general lending rule, but the 

proposal will impose limitations on the 

permissible term, amount, and fees 

associated with an STS loan. The STS 

loan alternative will assist FCUs in 

meeting their mission to promote thrift 

and meet their members’ credit needs, 

particularly the provident needs of 

members of modest means. Permitting a 

higher interest rate for STS loans will 

permit FCUs to make loans cost 

effective while the limitations on the 

term, amount, and fees will 

appropriately limit the product to 

meeting its purpose as an alternative to 

predatory credit products. This rule also 

identifies ‘‘best practices’’ FCUs should 

incorporate into their individual STS 

programs. 

DATES: Comments must be received on 

or before July 6, 2010. 

ADDRESSES: You may submit comments 

by any of the following methods (Please 

send comments by one method only): 

• NCUA Web Site: http:// 

www.ncua.gov/news/proposed_regs/

proposed_regs.html. Follow the 

instructions for submitting comments. 

• E-mail: Address to 

regcomments@ncua.gov. Include ‘‘[Your 

name] Comments on Notice of Proposed 

Rulemaking (Short-term, Small Amount 

Loans)’’ in the e-mail subject line. 

• Fax: (703) 518–6319. Use the 

subject line described above for e-mail. 

• Mail: Address to Mary Rupp, 

Secretary of the Board, National Credit 

Union Administration, 1775 Duke 

Street, Alexandria, Virginia 22314– 

3428. 

• Hand Delivery/Courier: Same as 

mail address. 

Public inspection: All public 

comments are available on the agency’s 

Web site at http://www.ncua.gov/

RegulationsOpinionsLaws/comments as 

submitted, except as may not be 

possible for technical reasons. Public 

comments will not be edited to remove 

any identifying or contact information. 

Paper copies of comments may be 

inspected in NCUA’s law library, at 

1775 Duke Street, Alexandria, Virginia 

22314, by appointment weekdays 

between 9 a.m. and 3 p.m. To make an 

appointment, call (703) 518–6546 or 

send an e-mail to OGCMail@ncua.gov. 

FOR FURTHER INFORMATION CONTACT: 

Justin M. Anderson, Staff Attorney, 

Office of General Counsel, at the above 

address or telephone (703) 518–6540. 

SUPPLEMENTARY INFORMATION. 

A. Background 

NCUA proposes to amend its general 

lending rule to provide a regulatory 

framework so FCUs can be a viable 

alternative to high-cost payday lenders. 

The term ‘‘payday loan’’ generally refers 

to a small, short-term loan that is 

intended, specifically, to cover a 

borrower’s expenses until his or her 

next payday, when the loan is to be 

repaid in full. NCUA Instruction 10200, 

Credit Union Online Instruction Guide, 

page 32 (12/2009). Historically, these 

loans have often been made by lenders 

who charge high fees and sometimes 

engage in predatory lending practices. 

While some payday loan borrowers use 

these loans sparingly, many other 

borrowers find themselves in cycles 

where their loans ‘‘roll over’’ repeatedly, 

incurring even higher fees. These 

borrowers are often unable to break free 

of this unhealthy dependence on 

payday loans. The NCUA Board (the 

Board) believes this dependence often 

reflects or exacerbates other financial 

difficulties payday loan borrowers are 

experiencing. The Board believes that, 

under the proper regulatory framework, 

FCUs can offer their members a 

reasonable alternative to high-cost 

payday loans and be a source of fair 

credit. 

The Board believes this proposed rule 

would achieve short and long-term 

benefits for current payday borrowers. 

In the short-term, this proposed rule 

would provide borrowers with a 

responsible alternative to high-cost 

payday loans; in the long-term, the 

Board believes this rule will permit 

FCUs to offer borrowers a way to break 

the cycle of reliance on payday loans by 

building credit and converting to 

traditional, main-stream financial 

products. Unlike payday lenders, which 

rarely report their customers’ payment 

of loans to credit bureaus, FCUs will 

generally be reporting their members’ 

payment histories with STS loans to the 

credit bureaus. Members who 

successfully pay off STS loans at FCUs 

will likely be able to improve their 

credit scores and qualify for future loans 

at lower costs. 

NCUA’s 5300 Call Report data, for the 

time period ending December 31, 2009, 

indicate that approximately 352 FCUs 

currently offer various types of payday 

loan alternatives, and approximately 

605 FCUs currently offer micro loans, 

which are loans with a principal under 

$500. The products currently being 

offered by FCUs include a mix of open 

and closed-end loans. With regard to 

open-end products, the Board notes this 

proposal does not address or alter the 

applicable regulations governing these 

products and does not prohibit openend programs that are currently 

permissible. In addition, this proposed 

rule would not prohibit an FCU from 

continuing or participating in a closedend payday loan program that currently 

operates successfully and is legal under 

NCUA’s regulations and the Federal 

Reserve Board’s Regulation Z (Reg Z). 

12 CFR part 226. 

As evidenced by the small number of 

FCUs currently offering payday loan 

alternatives, the Board recognizes the 

current legal framework makes it 

difficult for FCUs to establish a safe and 

sound STS loan program for closed-end 

loans that satisfies the legal 

requirements of NCUA’s regulations and 

the Federal Credit Union Act (the Act). 

For example, the Board notes some 

FCUs have charged high ‘‘application’’ 

fees to offset the risk of STS loans and 

remain under the current interest rate 

ceiling. These high fees, however, may 

be contrary to FCUs providing members 

with a better alternative to high-cost 

payday loans. Also, application fees that 

exceed the cost of processing the 

application may be deemed finance 

charges under Reg Z and result in an 

FCU violating NCUA’s interest rate 

ceiling. 

B. Legal Framework 

While the Act permits FCUs to make 

loans and extend lines of credit to 

members, it prohibits FCUs from 

charging an annual percentage rate 

(APR), inclusive of all finance charges, 

above 15%. 12 U.S.C. 1757(5)(A)(vi). 

The Act, however, permits the Board, 

after considering certain statutory 

criteria, to establish a higher interest 

rate ceiling in 18-month cycles. Id. At 

its July 2009 meeting, the Board 

reapproved an APR ceiling of 18%, 

effective until January 2011. NCUA 

Letter to Federal Credit Unions 

09–FCU–06 (July 2009). 

NCUA’s long-standing policy has 

been to look to the definition of ‘‘finance 

charge’’ in Reg Z to determine what fees 

are finance charges. The NCUA Board 

articulated this policy in the preamble 


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24498 Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Proposed Rules 

1The Board notes the Fed has proposed a rule 

that would remove most finance charge exclusions 

for closed-end credit transactions secured by real 

property or a dwelling. The Fed’s proposed rule 

solicited public comment on whether to expand 

this provision to encompass all closed-end 

transactions. Truth in Lending, 74 FR 43232 

(August 26, 2009). The comment period closed in 

December of 2009, and, if the Fed amends the 

definition of finance charges for all closed-end 

transactions, the Board will consider revising the 

requirements of this proposal. 

2 In 2007, the FDIC implemented a voluntary pilot 

program to assess the viability of banks offering 

short-term loans. The FDIC’s SDLG provided for a 

maximum APR of 36%, inclusive of all fees, and 

issued guidelines for a bank to participate in the 

program. Federal Deposit Insurance Company, Final 

Guidelines for Affordable Small-Dollar Loans, 

PR–52–2007 (2007). 

3 In the fourth quarter of the FDIC’s pilot program, 

the average APR was 20% and the maximum APR 

was 35.5%. The average of these two figures is 

27.75%. The FDIC’s Small-Dollar Loan Pilot 

Program: A Case Study After One Year, FDIC 

Quarterly, Volume 3, No. 2 (2009) 4The Department of Defense regulations 

implementing the Talent Amendment permit a 36% 

APR inclusive all fees associated with extension of 

credit to a covered borrower if they are financed, 

deducted from the proceeds of the consumer credit, 

or otherwise paid as a condition of the credit. 72 

FR 50592 (August 31, 2007). For additional 

discussion of issues regarding implementation and 

oversight of the regulation see Department of 

Defense Report to the U.S. Senate on 

Implementation of Limitations on Terms of 

Consumer Credit Extended to Service Members and 

Dependents (2008) at http://www.dcuc.org/

PDF%20Files/Senate%20Report%20Final.pdf. 

5Currently, 14 states have usury caps on smalldollar loan products, which have an average rate of 

24.2%. 

6See fn. 3. In the FDIC’s pilot program, some 

participating banks were able to offer loans at an 

APR less than maximum permissible APR. Federal 

Deposit Insurance Company, The FDIC’s SmallDollar Loan Pilot Program: A Case Study after One 

Year, FDIC Quarterly Vol. 3, No. 2 (2009). The 

SDLG is located on the FDIC’s Web site at 

www.FDIC.gov/smalldollarloans. 

of a final rulemaking, and the Office of 

General Counsel has subsequently 

reiterated the policy in numerous legal 

opinions. 45 FR 22888, 22890 (April 4, 

1980); OGC Op. 91–0412 (April 30, 

1991); OGC Op. 03–1050 (November 10, 

2003). 

Reg Z defines ‘‘finance charge’’ 

broadly as including ‘‘any charge 

payable directly or indirectly by the 

consumer and imposed directly or 

indirectly by the creditor as an incident 

to or a condition of the extension of 

credit.’’ 12 CFR 226.4(a). As a result, 

most fees charged in connection with an 

extension of credit are considered 

finance charges. 

Reg Z, however, expressly excludes 

certain charges from the definition of 

finance charge. Relevant to this 

proposed rule, Reg Z excludes 

‘‘[a]pplication fees charged to all 

applicants for credit, whether or not 

credit is actually extended.’’ 12 CFR 

226.4(a). The Official Staff 

Interpretations to Reg Z further 

explains: 

An application fee that is excluded from 

the finance charge is a charge to recover the 

costs associated with processing applications 

for credit. The fee may cover the costs of 

services such as credit reports, credit 

investigations, and appraisals. The creditor is 

free to impose the fee in only certain of its 

loan programs, such as mortgage loans, 

However (sic), if the fee is to be excluded 

from the finance charge under § 226.4(c)(1), 

it must be charged to all applicants, not just 

to applicants who are approved or who 

actually receive credit. 

12 CFR part 226, supp. I, section 

226.4—Finance Charge, 4(c) Charges 

excluded from the finance charge. 

Paragraph 4(c)(1). 

To provide more flexibility for STS 

loans, the Board considered changing 

NCUA’s long-standing policy of looking 

to Reg Z in defining finance charge. The 

Board, however, has determined that a 

consistent interpretation of finance 

charge, in line with requirements for 

other lenders, will be more easily 

understood by members and FCUs.1 The 

Board, therefore, is proposing to amend 

NCUA’s general lending rule by 

permitting a separate and higher interest 

rate ceiling for STS loans. The Board 

notes this proposed rule prohibits FCUs 

making loans using the higher interest 

rate ceiling from charging any fees in 

excess of a capped application fee and 

restricts the duration and amount of 

STS loans. 

C. Proposed Changes 

1. Interest Rate Ceiling 

Payday lenders often charge APRs in 

excess of 400%. Without an increase in 

NCUA’s allowable APR for STS loans, 

the Board believes it may be almost 

impossible for some FCUs to provide 

these types of loans to members. The 

Board believes small FCUs in particular, 

which often have members in need of 

this type of loan, would not be able to 

operate an STS loan program under 

NCUA’s current interest rate ceiling in 

a cost-effective manner. 

Historically, the Board has had one 

interest rate ceiling for lending, which 

has ranged between 15% and 21%. The 

Board does not believe it is necessary to 

raise the interest rate ceiling for all 

credit products. Rather, the Board’s 

authority to establish a higher interest 

rate than set by the Act encompasses 

authority, once the statutory criteria are 

met, to establish different rates for 

different products. The Board, therefore, 

proposes to set a higher interest rate 

ceiling only for STS loans made in 

accordance with the proposed 

requirements of this rule. 

The Board believes an annual 

percentage rate (APR) of 1000 basis 

points above the established general 

interest rate ceiling, as set by the Board, 

is sufficient for FCUs to offer STS loans 

with a reasonable return considering 

they are unsecured and have a high risk 

of loss. Based on the current interest 

rate ceiling, the maximum APR under 

this proposed rule would be 28%. This 

figure is lower than the maximum 

permissible interest rate under both the 

Talent Amendment, Public Law 109– 

364, section 670, 120 Stat. 2266 (2006) 

(codified at 10 U.S.C. 987), and the 

FDIC’s Small-Dollar Loan Pilot Program 

Guidelines (SDLG).2

In determining an APR ceiling for STS 

loans, the Board examined data 

collected by the FDIC during the first 

year of its pilot program and determined 

an APR that averaged the maximum 

APR and the average APR offered by 

banks under the program was an 

appropriate figure for FCUs.3 In 

addition to accounting for the not-forprofit nature of FCUs, a 28% APR also 

takes into account that the APR under 

both the Talent Amendment 4 and the 

FDIC’s SDLG is inclusive of all fees, 

while this proposed rule permits a 

capped application fee in addition to 

the set APR. The APR ceiling in this 

proposed rule also considers the average 

usury caps and payday loan laws 

enacted by several states.5

The Board realizes that interest 

income alone may not be sufficient to 

recover losses and the costs of 

processing an application, and, 

therefore, is proposing FCUs be 

permitted to charge a capped 

application fee as discussed below. The 

Board, however, is requesting specific 

comment on the possibility of using a 

36% APR inclusive of all fees, either as 

an alternative to or in lieu of the 

structure in this proposed rule. The 

Board notes that, although this proposed 

rule allows a higher APR ceiling for STS 

loans than for all other FCU loans, it 

encourages FCUs to charge only an APR 

that allows an STS loan program to 

operate in a safe and sound manner.6

2. Application Fees 

The Board recognizes that some 

payday lenders charge fees, disguised as 

‘‘application’’ fees, to account for the risk 

of loss associated with STS loans. Often 

these fees exceed $50 and are sometimes 

tied to the amount of the loan. As noted 

above, Reg Z defines an application fee 

as the fee necessary to recoup actual 

costs incurred by the lender in 

reviewing an application. The Board 

believes it is illegal under the Act and 


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Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Proposed Rules 24499 

7FDIC cites that 26 banks in the pilot program 

made 4,338 loans with a total principal balance of 

$5.2 million. Dividing the total principal balance by 

the total number of loans equals an approximate 

average loan of $1,198.71. Federal Deposit 

Insurance Company, The FDIC’s Small-Dollar Loan 

Pilot Program: A Case Study After One Year, FDIC 

Quarterly Vol3, no. 2 (2009). 

8Nancy Pierce, Payday Lending: The Credit 

Union Way, CUNA LENDING COUNCIL & 

NATIONAL CREDIT UNION FOUNDATION/REAL 

SOLUTIONS® (2008), available at http://

realsolutions.coop/assets/2008/7/23/NancyPierce

CUNALendingCouncilPaydayLendingWhitePaper

WithNCUFAndREALSolutions.pdf. 

9 Keith Ernst, John Farris & Uriah King, 

Quantifying the Economic Cost of Predatory Payday 

Lending, Center for Responsible Lending (2003), 

available at http://www.responsiblelending.org/

pdfs/CRLpaydaylendingstudy121803.pdf. 

Reg Z for FCUs to link fees to the loan 

amount or charge application fees this 

high. 

The credit worthiness determination 

in payday lending scenarios is often 

minimal, consisting of a verification of 

employment, age, and residence; 

sometimes, it is less than that. The 

Board is proposing to restrict FCUs 

making STS loans to charging an 

application fee in accordance with the 

definition in Reg Z that is no more than 

$20. Reg Z limits application fees to the 

recovery of costs associated with 

processing applications for credit that 

are charged to all consumers who apply, 

regardless if credit is actually extended. 

12 CFR 226.4(c)(1). 

The Board believes that, for FCUs to 

offer an economically-viable product, 

they must be permitted to recover the 

costs associated with processing an 

application up to a reasonable amount. 

The Board recognizes STS loans present 

a higher degree of risk, but it is the 

interest rate, not the application fee, on 

which FCUs should rely to address that 

risk. The Board believes an application 

fee should recoup the costs associated 

with processing an application, and 

FCUs should rely on interest income to 

account for losses and create a 

sustainable product. 

In determining an appropriate 

maximum application fee, the Board 

considered the limited underwriting 

associated with STS loans and the 

ability of FCUs to process applications 

efficiently for this product. The Board 

believes a maximum application fee of 

$20 would adequately permit FCUs to 

recover their processing costs and 

provide a responsible alternative for 

members. 

3. Maturity and Amount 

This proposed rule would also set a 

minimum and maximum maturity and 

dollar amount for STS loans. The Board 

believes it is necessary to specifically 

establish the terms for this type of loan 

to ensure FCU members are able to 

manage repayment. 

The Act allows the Board to prescribe 

rules and regulations regarding how 

loans are to be repaid. 

Loans shall be paid or amortized in 

accordance with rules and regulations 

prescribed by the Board after taking into 

account the needs or conditions of the 

borrowers, the amounts and duration of the 

loans, the interest of the members and the 

credit unions, and such other factors as the 

Board deems relevant. 

12 U.S.C. 1757(5)(A)(ix). 

In considering the nature of STS 

loans, the Board proposes to set the 

maturity at a minimum of one month 

and a maximum of six months. Payday 

loans generally must be repaid within 

two weeks, regardless of loan amount, 

often causing borrowers to roll the loans 

over to avoid default. The proposed rule 

prohibits ‘‘roll-overs,’’ so FCUs need to 

set a maturity, within this range, based 

on the amount of the loan and the 

borrower’s ability to repay. The Board 

believes setting a minimum and 

maximum loan term will make STS 

loans a better alternative to payday 

loans. 

The Board also proposes setting the 

amount of a qualifying STS loan at a 

minimum of $200 and a maximum of 

$1,000. The maximum amount is 

slightly lower than the average loan 

amount in the FDIC’s pilot program.7

However, the Board believes a 

maximum loan amount of $1,000 will 

provide borrowers with lending 

comparable to payday lenders and 

possibly permit borrowers to pay off 

current payday loans and transition to 

more responsible FCU products, helping 

borrowers to break the payday cycle. 

Regarding the $200 minimum loan, the 

Board believes this minimum is 

reasonable in terms of the maximum 

$20 permissible application fee the rule 

permits and recognizes there is demand 

for short-term loans in this amount. 

Available data suggests the average, 

traditional payday loan amount is 

between $300 and $400.8

This proposed rule would also impose 

a limit on the number of STS loans an 

FCU may lend to a member at any one 

time and on the total number of these 

loans an FCU may make to a member in 

any rolling six-month period. 

Specifically, an FCU would only be 

permitted to make one loan at a time to 

a member and no more than three in any 

rolling six-month period. The proposed 

rule also prohibits FCUs from granting 

roll-overs to a borrower. The Board 

believes these provisions of the rule will 

work to curtail a member’s repetitive 

use and reliance on this type of product, 

which often compounds the member’s 

already unstable financial condition. 

The Board notes that average borrowers 

use a payday product in excess of eight 

times per year, most of which are 

continuous ‘‘roll-overs’’ of an initial 

loan.9 The Board recognizes that 

continuously ‘‘rolling-over’’ a loan can 

subject a borrower to additional fees and 

repayment amounts that are 

substantially more than the initial 

amount borrowed. The Board believes 

that this proposed rule offers terms that 

will eliminate the need for a borrower 

to roll over a loan. 

FCUs should set a loan amount and 

loan terms based on the borrower’s 

ability to repay. The Board notes FCUs 

are not expected to run a credit report 

on a borrower to determine ability to 

repay STS loans. Rather, an FCU should 

be able to use a borrower’s proof of 

recurring income as the key criterion in 

developing standards for maturity 

lengths and loan amounts so a borrower 

can repay the loan without roll-overs. 

As noted above, the intent of this rule 

is to permit FCUs to provide a viable, 

responsible alternative to high-cost 

payday loans, which will help members 

break the cycle, improve their credit 

scores and gain or re-gain access to 

mainstream financial products. 

This rule does not address charging 

fees for late payments or defaults in an 

STS loan program. FCUs can impose 

late fees that comply with NCUA’s 

credit practices rule, 12 CFR Part 706. 

However, FCUs should be careful that 

late fees do not exacerbate a borrower’s 

financial situation. FCUs should be 

careful in setting maturity terms and 

loan amounts based on a borrower’s 

proof of recurring income so that 

borrowers will be able to pay off the 

loan without incurring late fees. 

4. Cap on Loan Volume and 

Underwriting 

In addition to the requirements 

relating to making an STS loan, the 

proposed rule would require FCUs to 

include, in their written lending 

policies, a cap on both the total number 

and total dollar amount of STS loans. 

The Board is concerned with the 

inherent higher risk in STS loans, which 

may be heightened by an initially high 

loan volume. The Board believes a high, 

initial loan volume, coupled with likely 

higher defaults, could stretch resources 

for collections and expose the FCU to 

unnecessary risks. 

Alternatively, and in order to limit 

risks on FCUs’ balance sheets and to 

ensure that STS loan volume does not 

overwhelm FCUs’ lending and 

collections operations, the Board is 

considering setting a cap in the final 


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24500 Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Proposed Rules 

10The FDIC’s SDLG highlights many of the 

features, including underwriting, that make payday 

loans attractive to borrowers. Federal Deposit 

Insurance Company, Final Guidelines for 

Affordable Small-Dollar Loans, PR–52–2007 (2007). 

rule on the dollar amount, percentage 

and/or number of STS loans that FCUs 

can have outstanding at any given time. 

The Board seeks comments on how such 

a cap could be structured, for example, 

as a percentage based on assets or other 

formula, while meeting the overall 

objectives of this proposed rule. 

Finally, the Board is proposing to 

require FCUs to implement appropriate 

underwriting criteria for STS loans to 

minimize risk. In developing 

underwriting criteria, an FCU should 

focus on the member’s relationship with 

the FCU and the borrower’s ability to 

repay the loan at or before maturity. 

Based on the member’s potential 

ongoing relationship with the FCU and 

the small-dollar amount of the loan, an 

FCU may only need to review a 

member’s account records and proof of 

recurring income. To verify proof of 

income, FCUs should require a member 

to produce at least two recent paycheck 

stubs. Below, the Board requests 

specific comment on requiring 

borrowers to participate in direct 

deposit or a payroll deduction program 

as a condition of an extension of credit 

under this rule, which may assist an 

FCU in verifying a member’s 

employment status for underwriting 

purposes. As noted above, however, the 

Board does not believe it is generally 

necessary for an FCU’s underwriting to 

include a credit report. The Board 

believes an FCU’s underwriting criteria 

should address a member’s need for 

quickly available funds but adhere to 

the principles of responsible lending. 

5. Guidance and Best Practices 

Although the Board is not proposing 

specific underwriting standards, risk 

avoidance methods, or program features, 

FCUs should consider the ‘‘best 

practices,’’ discussed below, in 

developing an STS program. The Board 

believes the proximity of including the 

‘‘best practices’’ in the regulatory text 

will be helpful to FCUs. These practices 

are not regulatory requirements, but 

FCUs should consider them in 

developing an STS program. FCUs 

should also consider guidance NCUA 

issued last year on payday alternatives. 

NCUA Letter to Federal Credit Unions, 

‘‘Payday Lending’’ 09–FCU–05 (July 

2009) (09–FCU–05) (available on 

NCUA’s Web site at http:// 

www.ncua.gov/Resources/09–FCU– 

05.pdf). In addition, the Board has 

reviewed the FDIC’s SDLG and notes 

these guidelines also offer prudent 

suggestions for an FCU to consider in 

developing an STS loan program.10

Although STS loan programs can be a 

useful method of serving members, 

there are inherent risks in this type of 

loan. In developing an STS loan 

program, FCUs should consider the 

credit, transaction, fraud, reputation, 

and compliance risks. FCUs should also 

consider the risks for members of 

receiving STS loans and try to minimize 

them. The Board encourages FCUs to 

use STS loans as a means of serving 

more members and, through financial 

counseling and other methods, attempt 

to help members move away from STS 

loans in favor of an FCU’s more 

mainstream products and services. See 

09–FCU–05. FCUs should also consider 

offering certain additional features such 

as a savings component or electronic 

loan transactions as part of a successful 

STS program. The Board is also 

recommending FCUs, at least in the 

initial stages of an STS loan program, 

consider a length of membership 

requirement of at least three months. 

The Board recognizes there is a higher 

risk of default among new members as 

opposed to members with an 

established relationship with an FCU. 

The Board is seeking comment on 

whether a certain length of membership 

should be required, or whether each 

FCU should evaluate their own risk 

tolerance and decide on a membership 

requirement accordingly. Rather than 

prescribe specific membership features 

that must be included in an STS 

program, this proposed rule would 

allow an FCU to make this 

determination based on its capabilities 

and the needs of its members. 

D. Request for Comments 

In addition to comments on all 

aspects of this proposed rule, the Board 

would appreciate specific comments 

from credit unions currently offering 

viable small amount loan programs. In 

drafting a final rule, the Board is 

interested in learning from the 

experience credit unions have had in 

operating a successful program and the 

specific features that have led to a 

program’s success as a sustainable and 

responsible alternative to payday 

lending. Also, the Board would 

appreciate comments on certain 

alternative provisions or requirements 

that agency staff considered in drafting 

the proposed rule. 

The Board is interested in comments 

on whether the final rule should require 

amortization and prohibit balloon 

payments on STS loans. The Board is 

concerned that requiring a member to 

pay back the entire amount or a 

substantial portion of an STS loan in 

one payment may not be feasible for 

some borrowers and may exacerbate a 

borrower’s weak financial situation. The 

Board is also concerned that STS loans 

with balloon payments may cause 

additional financial problems for 

borrowers or lead them to return to 

payday lenders. 

Another alternative on which the 

Board requests comments is whether the 

final rule should set a 36% APR ceiling 

inclusive of all fees, either in addition 

to or in lieu of the maximum APR and 

application fee terms in the proposed 

regulatory text. The Board notes an allinclusive APR would not include fees 

for unanticipated late payments, 

defaults, delinquencies, or similar 

occurrences. As noted above, a 36% 

APR ceiling, inclusive of all fees, would 

track the approaches of the FDIC in its 

pilot program and the Department of 

Defense regulations. Under the 

proposed rule, it may be difficult for 

FCUs to offer STS loans to military 

borrowers in accordance with the 

Department of Defense regulations. 

Finally, the Board requests comments 

on whether the final rule should require 

borrowers to participate in direct 

deposit or a payroll deduction program 

as a condition of obtaining an STS loan. 

Direct deposit is the electronic deposit 

of funds into a member’s account, while 

a payroll deduction program is an 

automatic deduction from a member’s 

salary before it is deposited in the 

member’s account. Direct deposit and 

payroll deduction are useful tools in 

managing an FCU’s exposure. 

Specifically, both direct deposit and 

payroll deduction can help an FCU 

verify employment and income levels of 

a borrower and help determine the 

appropriate loan term and amount. In 

addition, direct deposit helps to ensure 

there is a recurring source of income, 

which an FCU may be able to use to 

recoup a defaulted loan. Further, a 

payroll deduction program provides 

FCUs with an easy way to ensure 

payment is made. 

Regulatory Procedures 

Regulatory Flexibility Act 

The Regulatory Flexibility Act 

requires NCUA to prepare an analysis to 

describe any significant economic 

impact a proposed rule may have on a 

substantial number of small credit 

unions (those under $10 million in 

assets). This proposed rule increases the 

interest rate ceiling for STS loans and 

sets out several STS loan program 

requirements an FCU must meet to take 

advantage of the higher interest rates. 


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Federal Register / Vol. 75, No. 86 / Wednesday, May 5, 2010 / Proposed Rules 24501 

The proposed rule will not have a 

significant economic impact on a 

substantial number of small credit 

unions, and, therefore, a regulatory 

flexibility analysis is not required. 

Paperwork Reduction Act 

This rule adds a requirement that 

federal credit unions establish a cap on 

short-term, small-dollar loans in their 

general written lending policies, which 

federal credit unions are already 

required to maintain and is currently 

approved under the Paperwork 

Reduction Act control number 3133– 

0139. NCUA has determined that the 

requirements of this rule are additions 

to an FCU’s customary business records 

and do not increase the paperwork 

requirements under the Paperwork 

Reduction Act of 1995 and regulations 

of the Office of Management and 

Budget. 

Executive Order 13132 

Executive Order 13132 encourages 

independent regulatory agencies to 

consider the impact of their actions on 

state and local interests. In adherence to 

fundamental federalism principles, 

NCUA, an independent regulatory 

agency as defined in 44 U.S.C. 3502(5), 

voluntarily complies with the executive 

order. The proposed rule would not 

have substantial direct effects on the 

states, on the connection between the 

national government and the states, or 

on the distribution of power and 

responsibilities among the various 

levels of government. NCUA has 

determined that this proposed rule does 

not constitute a policy that has 

federalism implications for purposes of 

the executive order. 

The Treasury and General Government 

Appropriations Act, 1999—Assessment 

of Federal Regulations and Policies on 

Families 

NCUA has determined that this 

proposed rule would not affect family 

well-being within the meaning of 

section 654 of the Treasury and General 

Government Appropriations Act, 1999, 

Public Law 105–277, 112 Stat. 2681 

(1998). 

List of Subjects in 12 CFR Part 701 

Credit unions, Federal credit unions. 

Mary Rupp, 

Secretary of the Board. 

For the reasons discussed above, the 

National Credit Union Administration 

proposes to amend 12 CFR part 701 as 

set forth below: 

PART 701—ORGANIZATION AND 

OPERATIONS OF FEDERAL CREDIT 

UNIONS 

1. The authority citation for part 701 

continues to read as follows: 

Authority: 12 U.S.C. 1752(5), 1755, 1756, 

1757, 1759, 1761a, 1761b, 766, 1767, 1782, 

1784, 1787, 1789. Section 701.6 is also 

authorized by 15 U.S.C. 3717. Section 701.31 

is also authorized by 15 U.S.C. 1601 et seq.; 

42 U.S.C. 1981 and 3601–3610. Section 

701.35 is also authorized by 42 U.S.C. 4311– 

4312. 

In section 701.21, add paragraph 

(c)(7)(iii) to read as follows: 

§ 701.21 Loans to members and lines of 

credit to members. 

* * * * * 

(c) * * * 

(7) * * * 

(iii) Short-term, small amount Loans 

(STS loans). (A) Notwithstanding the 

provisions in § 701.21(c)(7)(ii), a federal 

credit union may charge an interest rate 

of 1000 basis points above the 

maximum interest rate as established by 

the Board, provided the federal credit 

union is making a closed-end loan in 

accordance with the following 

conditions: 

(1) The principal of the loan is not 

less than $200 or more than $1000; 

(2) The loan has a minimum maturity 

term of one month and a maximum 

maturity term of six months; 

(3) The federal credit union does not 

make more than three, STS loans in any 

rolling six-month period to any one 

borrower and makes no more than one, 

short-term, small amount loan at a time 

to a borrower; 

(4) The federal credit union must not 

roll-over any STS loan; 

(5) The federal credit union charges 

an application fee to all members 

applying for a new loan that reflects the 

actual costs associated with processing 

the application, but in no case may the 

application fee exceed $20; and 

(6) The federal credit union includes, 

in its written lending policies, a limit on 

the aggregate number of loans and 

aggregate dollar amount of loans made 

under this section and implements 

appropriate underwriting guidelines to 

minimize risk; for example, requiring a 

borrower to verify employment by 

producing at least two recent pay stubs. 

(B) STS Loan Program Guidance and 

Best Practices. In developing a 

successful STS loan program, a federal 

credit union should consider how the 

program will help benefit a member’s 

financial well-being while considering 

the higher degree of risk associated with 

this type of lending. The guidance and 

best practices are intended to help 

federal credit unions minimize risk and 

develop a successful program, but are 

not an exhaustive checklist and do not 

guarantee a successful program with a 

low degree of risk. 

(1) Program Features. Several features 

that may increase the success of an STS 

loan program and enhance member 

benefit include adding a savings 

component, financial education, 

reporting of members’ payment of STS 

loans to credit bureaus, or electronic 

loan transactions as part of an STS 

program. 

(2) Underwriting. Federal credit 

unions need to develop minimum 

underwriting standards that account for 

a member’s need for quickly available 

funds, while adhering to principles of 

responsible lending. Underwriting 

standards should address required 

documentation for proof of employment 

or income, including at least two recent 

paycheck stubs. FCUs should be able to 

use a borrower’s proof of recurring 

income as the key criterion in 

developing standards for maturity 

lengths and loan amounts so a borrower 

can repay the loan without roll-overs. 

For members with established accounts, 

FCUs should only need to review a 

member’s account records and proof of 

recurring income or employment. 

(3) Risk Avoidance. Federal credit 

unions need to consider risk avoidance 

strategies, including: Imposing a length 

of membership requirement, requiring 

members to participate in a payroll 

deduct program or direct deposit, and 

conducting a thorough evaluation of the 

federal credit unions resources and 

ability to engage in an STS loan 

program. 

* * * * * 

[FR Doc. 2010–10480 Filed 5–4–10; 8:45 am] 

BILLING CODE 7535–01–P 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 27 

[Docket No. FAA–2009–0413; Notice No. 10– 

04] 

RIN 2120–AJ51 

Fatigue Tolerance Evaluation of 

Metallic Structures; Extension of 

Comment Period 

AGENCY: Federal Aviation 

Administration (FAA), DOT. 

ACTION: Notice of proposed rulemaking 

(NPRM); extension of comment period. 

SUMMARY: This action extends the 

comment period for a NPRM that was 


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