My letter about credit unions who were attempting to demand ahalf a pound of flesh from their members was not clear (CU Times,Aug. 26). I was referring to federal credit unions. Federal creditunions are subject to strict usury limits imposed by Congress asdefined in the Federal Credit Union Act. I was responding to theprotestations of a federal credit union CEO who was interviewed inUSA Today on the virtues of payday lending. For a federal creditunion, all of the justifications for payday lending are interestingbut irrelevant. The arguments are nothing more than a repackagingof the “just profit” arguments advanced for centuries. For federalcredit unions there is no virtue in being usury lite.
Usury laws vary state by state. However, in the federal system,Congress through the Federal Credit Union Act, made it clear thatany rate above the present the NCUA authorized 18% is usurious, andthe 18% rate is only under unique circumstances. The NCUA isrequired to justify this matter periodically. The NCUA has amandate to return the rate back to 15% if the circumstances do notwarrant a higher rate. The maximum rate that the NCUA can approveis 21%.
Some state-chartered credit unions do business in states that donot have usury limits. The state places the moral dilemma on theshoulders of the credit union's board of directors.
Federal credit unions are required to protect members from usuriousprograms as a matter of law. The NCUA provided guidance on thematter. To its credit, it wrote a very broad instruction that gavefederal credit unions a lot of room to develop a lending programand charge fees consistent with Regulation Z. Here lies the rub!The NCUA is forcing credit unions to obtain individual legal andaccounting advice as to amount and type of charges that can be usedin processing the loan application. The NCUA has not involvedthemselves in the specifics of this matter. They did provide a listof examples. The list does not include a provision for loan lossesand legal fees. It is not an oversight that these fees areabsent.
I hope that any federal credit union that wishes to do a paydayloan program has sought appropriate legal advice concerningRegulation Z. I have checked with attorneys familiar withRegulation Z, and they advise that it would be difficult toconclude that loan losses are a charge that you can put into thefee to process a loan and avoid adjusting the interest rate above18% for a federal credit union.
It is regrettable that many credit union leaders, the tradeassociations and the NCUA are silent on the blight of paydaylending in the federal credit union industry. If the arguments thatare being advanced are correct, they should request that Congressraise the usury limits or ask that the Federal Reserve Board amendRegulation Z to include loan-loss projections and legal andaccounting costs in the charges that may constitute anadministrative fee excluded from the finance charge.

Bill Brooks
Certified Financial Planner
CU Prosper
Rehoboth Beach, Del.