The National Credit Union Administration has extended its longstanding interest rate cap on loans underwritten by federally-chartered institutions, as concerns around inflation plague industry leaders and trade groups.
NCUA officials voted unanimously at the agency’s monthly board meeting Thursday to sustain the 18% interest rate ceiling for loans made by federal credit unions — excluding those made under the agency’s Payday Alternative Loan program — for an 18-month period beginning on March 11, 2023. The cap has remained unchanged since 1987.
While the Federal Credit Union Act of 1934 specifies that 15% is the maximum rate federally-chartered institutions can charge members for interest on loans, a provision included within the legislation grants the NCUA the right to go beyond that limit for an 18-month period.
The agency can only do so after first determining that money market interest rates have risen over the six months leading up to the adjustment, and that current interest rates jeopardize the “safety and soundness of individual credit unions as evidenced by adverse trends in liquidity, capital, earnings and growth,” according to the terms specified in the act.
Todd Harper, chairman of the NCUA, highlighted how board members were faced with conflicting stances as research conducted by the agency and feedback from other governmental entities supported the extension of the current cap, but outcry from individual trade groups and credit unions called for the adoption of a floating ceiling, or a greater increase to 21%.
“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. … An increased interest rate ceiling would place greater burdens on the households who hold credit card debt and tip some family budgets into the red,” Harper said during the meeting. “We, therefore, ought to move carefully before acting.”
Recent call report data showed that 2,177 federal credit unions — roughly 72% of all federally-chartered institutions — were underwriting unsecured loans at rates that exceeded 15%.
Despite accounting for only 3.4% of all loans by federal credit unions, these funds are a vital source of credit for low income members, according to John Nilles, senior capital market specialist in the Office of Examination and Insurance at the NCUA.
The interest-rate limit for the agency’s Payday Alternative Loan program, while not encompassed under this decision, is also dependent on the ceiling set by the NCUA. The loan program is permitted a maximum of 1000 basis points above the cap.
Responding to the calls for raising the interest rate limit to 21%, NCUA Vice Chairman Kyle Hauptman expressed concern over a lack of data that would support adopting the highest ceiling in the past few decades. Hauptman pushed for further review.
“Low-income and credit unions [certified as Community Development Financial Institutions] depend upon the ‘head room’ the ceiling provides above the statutory rate of 15%. … With inflation and the increase of the cost of funds, these credit unions will have to make the hard choice of whether to serve their neediest members,” Hauptman said.
The agency will run further examinations on the true impact of the rate limit, as well as the legality of a floating interest rate, with plans to discuss its findings at the NCUA’s board meeting in April.
“As the board noted in 1987, ‘restrictive interest rate ceilings would result in more stringent card issuance criteria,’ [and] that is exactly what we might see play out in the current environment,” said NCUA board member Rodney Hood.