Comparing PALs I and PALs II Loans
In October, the NCUA Board issued a final rule authorizing a second category of payday alternative loans - PALs II loans. PALs II loans are another type of payday alternative loan, in addition to PALs I loans, that federal credit unions can offer their members. The final rule became effective on December 2, 2019.
In 2010, the NCUA Board amended NCUA's general lending rule in section 701.21 to permit federal credit unions to provide their members with alternatives to payday loans. The purpose of the 2010 rulemaking was described in the 2010 proposed rule:
"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." See, 75 Fed. Reg. 24497.
And PALs II loans were designed to provide federal credit unions with flexibility that was not built into the PALs I rule. This was an attempt by the NCUA Board to "ensure that all FCUs that are interested in offering PALs loans are able to do so." See, 83 Fed. Reg. 25584. In the 2018 PALs II proposed rule, the NCUA Board noted that the data it reviewed in the wake of the implementation of the PALs I final rule "only showed a modest increase in the number of FCUs offering these loans." See, 83 Fed. Reg. 25584.
That said, PALs I and II loans share some common characteristics. Like the PALs I loan, credit unions may charge interest at a rate of up to 1,000 basis points above the current usury ceiling for a PALs II loan. See, 84 Fed. Reg. 51945. This means that the maximum interest rate for a PALs I or PALs II loan at this time is 28 percent. A PALs II loan, just like a PALs I loan, must be closed-end. See, 84 Fed. Reg. 51943. A credit union may not make more than one PALs I or PALs II loan to a member at a time and no more than three PALs I or PALs II loans to a member within any six month rolling period. See, 84 Fed. Reg. 51944. A credit union may not roll over PALs I or PALS II loan, unless the extension does not result in any additional fees or involve an extension of additional credit. See, 84 Fed. Reg. 51944. Both PALs I and PALs II loans must be fully amortized over the life of the loan. See, 84 Fed. Reg. 51944. A credit union's lending policy must include appropriate underwriting guidelines to minimize the risk that might arise from offering a PALs I or PALs II loan. See, 12 CFR §§ 701.21(c)(7)(iii)(8) and (c)(7)(iv)(8).
The main differences between PALs I and PALs II loans are described in the comparison chart below:
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PALs I Requirement |
PALs II Requirement |
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Minimum principal amount of $200, and maximum principal amount of $1,000. |
No minimum principal amount. Maximum principal amount of $2,000. |
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Minimum term of one month, and maximum term of six months. |
Minimum term of one month, and maximum terms of twelve months. |
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Borrower must be a member of the credit union for at least one month before being eligible for a PALs I loan. |
Member is immediately eligible for PALs II loan – no waiting period. |
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No prohibition on overdraft/NSF fees. |
Overdraft/NSF fee for overdraft service as defined in Regulation E cannot be assessed in connection with a PALs II loan. |
A federal credit union does not have to offer PALs II loans. As the NCUA Board clarified in the 2018 proposed rule, "[a]n FCU could choose to make PALs I loans, PALs II loans, or both." See, 83 Fed. Reg. 25584.