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TO: NCUA Board
FROM: Office of Examination and Insurance
DATE: July 8, 2024
SUBJ: Federal Credit Union Loan Interest Rate Ceiling
ACTION REQUESTED: Pursuant to 12 United States Code (U.S.C.) §1757(5)(A)(vi)(I), NCUA Board approval to maintain the current temporary 18-percent interest rate ceiling for loans made by federal credit unions for a new 18-month period from September 11, 2024, through March 10, 2026.
DATE ACTION REQUESTED: July 18, 2024
OTHER OFFICES CONSULTED: Office of General Council, Office of Chief Economist, and the Office of Consumer Financial Protection
VIEWS OF OTHER OFFICES CONSULTED: Concur
BUDGET IMPACT, IF ANY: None
SUBMITTED TO INSPECTOR GENERAL FOR REVIEW: Yes
RESPONSIBLE STAFF MEMBERS: Kelly Lay, Director; Amanda Parkhill, Deputy Director; Tao Cheng, Acting Associate Director; Naghi Khaled, Director of Credit Markets; Jessica Yam, Senior Credit Markets Specialist; Office of Examination and Insurance.
SUMMARY: The Federal Credit Union Act limits the interest rate federal credit unions can charge on loans to 15 percent,1 and provides the NCUA Board with the ability to set a higher interest rate if “after consultation with the appropriate committees of the Congress, the Department of Treasury, and the Federal financial institution regulatory agencies, an interest rate ceiling exceeding such 15 per centum per annum rate, for periods not to exceed 18 months, if it determines that money market interest rates have risen over the preceding six-month period and that the prevailing interest rate levels threaten the safety and soundness of individual credit unions as evidenced by adverse trends in liquidity, capital, earnings, and growth.”2
As required, the NCUA sent consultation letters in April 2024 to the appropriate committees of the Congress, the Department of Treasury, and the Federal financial institution regulatory agencies. To date, the NCUA did not receive any responses.
As detailed in the attached staff analysis, the statutory criteria have been met for the NCUA Board to establish an interest rate ceiling exceeding 15 percent. Money market interest rates have risen over the preceding 6-month period. And, given prevailing interest rates, staff estimates that reversion to the statutory loan interest rate ceiling would threaten the safety and soundness of as many as 1,139 federal credit unions. As of December 31, 2023, there are 2,159 federal credit unions that hold over $42.6 billion in loan balances with rates above 15 percent. This includes the 467 federal credit unions making Payday Alternative Loans.3
Staff recommends the NCUA Board establish a temporary maximum loan interest rate ceiling of 18 percent for the 18-month period effective September 11, 2024, through March 10, 2026. In the current rate environment, an 18-percent interest rate ceiling provides federal credit unions with sufficient ability to manage liquidity, capital, earnings, and growth, protects member access to safe and affordable credit, and does not require federal credit unions to incur any additional workload or costs associated with a change to the rate ceiling.
RECOMMENDED ACTION: The Board approve a temporary 18-percent maximum loan interest rate for federal credit unions, effective September 11, 2024, through March 10, 2026.
ATTACHMENT: Supplemental Information and Analysis
Footnotes
1 The rate of interest may not exceed 15 per centum per annum on the unpaid balance inclusive of all finance charges. 12 U.S.C. §1757(5)(A)(vi).
2 12 U.S.C. §1757(5)(A)(vi)(I).
3 “Notwithstanding any other provision of this section, a federal credit union may charge an interest rate that is 1,000 basis points above the maximum interest rate established by the Board…” 12 C.F.R. § 701.21(c)(7)(iii)(A). If the loan interest rate ceiling reverts to the statutory rate, the maximum rate on Payday Alternative Loans would revert from 28 percent to 15 percent.