Loans by federal credit unions (FCUs), in most cases, will continue to be capped at 18% in interest rates, at least for the next 19 months, following action Thursday by the cooperatives’ regulator.
However, in a bow to demands from the industry, the regulator also agreed to “reevaluate the interest rate ceiling at the April Board meeting and to begin exploring the legal and policy issues related to a floating interest rate ceiling,” according to a press release.
The three-member National Credit Union Administration (NCUA) Board, made up of one Democratic appointee (Chairman Todd Harper) and two Republican designees, took the action on interest rates as part of its discretionary 18-month review of the rate cap. The Federal Credit Union Act (FCUA) caps the interest rate on FCU loans at 15%. However, the agency pointed out, the NCUA Board has the discretion to raise the limit for 18-month periods “if interest-rate levels could threaten safety and soundness of individual credit unions.”
The 18% cap applies to all FCU lending, according to the NCUA, except originations made under the agency’s payday alternative loan program, for which interest rates are capped at 28%. Credit unions chartered by the individual states are not subject to the federal cap, although they may face caps by their own states. About two-thirds of all credit unions are FCUs; the remainder are chartered by states.
According to Harper, raising the loan rate cap higher would hurt consumers, placing what he asserted would be “additional burdens on credit union member budgets already stressed thin by inflation and tighter credit conditions.”
Buttressing his comments, the NCUA said that its staff analysis found that money market rates have risen over the preceding six-month period and that lowering the rate ceiling below the current 18% maximum would threaten the safety and soundness of individual credit unions due to anticipated adverse effects on liquidity, capital, earnings, and growth. The staff analysis pointed out that the FCUA requires both those conditions to exist for the Board to approve an interest rate ceiling higher than 15%.
“The credit union system’s statutory mission is to support the saving and credit needs of all Americans, especially people of modest means, so that is yet another reason why the maximum interest rate on loans should not be raised at this time,” Harper added in a statement. “Keeping in place the current maximum interest rate on federal credit union loans for another 18 months is prudent and grounded in sound reasoning.”
In a letter to the NCUA (first reported Jan. 23 by CUToday.info), the Treasury Department said it saw no reason to raise the interest rate cap. However, credit union industry advocates, in their letters to the agency, had argued that not raising the rate cap would be detrimental to credit union lending. Board Member Rodney Hood (a Republican appointee) cited a letter from the the National Association of Federally Insured Credit Unions (NAFCU), which contended that the 18% rate meant that “less fortunate consumers and small businesses likely went without much-needed credit or, more likely, secured credit on much less favorable terms from other lenders” than they would have if FCUs were able to charge a higher rate.
The 18% cap now runs from March 11, 2023, to Sept. 10, 2024.
In other action, the NCUA Board unanimously approved its 2023 annual performance plan, which the agency said “provides specific direction and guidance toward achieving the mission and the strategic goals and objectives” outlined in its 2022-26 strategic plan.
Board Extends Loan Interest Rate Ceiling; Approves Annual Performance Plan