Principles for Making Responsible Small-Dollar Loans

Dear Boards of Directors and Chief Executive Officers:

In March 2020, the NCUA issued Letter to Credit Unions, 20-CU-04, Responsible Small-Dollar Lending in Response to COVID-19. That letter encouraged you to consider extending small-dollar loans to members experiencing economic hardship related to the COVID-19 pandemic, and discussed the Joint Statement Encouraging Responsible Small-Dollar Lending in Response to COVID-19 issued on March 26, 2020.

To provide additional guidance, on May 20, 2020, the NCUA and the federal banking agencies released the attached Interagency Lending Principles for Offering Responsible Small-Dollar Loans. The general principles described in the statement apply to all credit unions that make small-dollar loans. Credit unions should underwrite small-dollar loans based on prudent policies, offer these products in a manner consistent with safe and sound practices, comply with consumer protection and other applicable laws and regulations, and treat members fairly. Effectively managing the credit, operational, and compliance risks associated with these loans is also an important undertaking for credit unions.

Credit unions have a long history of offering lower-cost, small-dollar alternatives to traditional payday loans. Such loans may include small unsecured loans, savings clubs, and emergency loans. Federal credit unions can also provide their members responsible small-dollar loans by offering Payday Alternative Loans (PALs) under NCUA regulations § 701.21(c)(7)(iii) and § 701.21(c)(7)(iv). The additional guidance and guardrails built into the PALs regulations make these loans generally consistent with the interagency small-dollar lending principles, but federal credit unions offering PALs must follow the specified regulatory framework for those loan programs.

For example, PALs I loans are limited to a maximum of $1,000 and a 6-month maturity, while PALs II loans are limited to a maximum of $2,000 and a 12-month maturity. Furthermore, the interest rate cap mandated by the Federal Credit Union Act provides a built-in mechanism to protect federal credit union members from high-cost loans.

I encourage you to consider providing responsible small-dollar loans to your members. If you have any questions about responsible small-dollar lending, please contact the NCUA’s Office of Consumer Financial Protection at OCFPmail@ncua.gov, your regional office, or your state supervisory authority.