As Prepared for Delivery on January 26, 2023
Ladies and gentlemen, the pending question before us today is whether the renewal of a temporary maximum loan rate of 18 percent, a rate that has been sustained continuously by the NCUA Board actions since 1987, should be extended again. Prior to 1987, the rate was 21 percent during what the then-Board called an “unstable environment.” The rate stayed at 21 percent from December 1980 until May 1987.
Given the current rapid rate of increase in the prime rate, which has increased over 400 basis points since early March 2022, a velocity we have not seen to this degree in many decades, the issue before us today requires a closer examination than when we last considered this the maximum loan rate ceiling. You could certainly call today’s inflationary environment “unstable.”
I will begin by saying that I would prefer that interest rates be set by the market and not by government fiat. However, my personal view on this subject is irrelevant because Congress has directed the NCUA Board to establish a loan rate ceiling and to justify any ceiling in excess of 15 percent after consulting with Congress and other federal financial agencies, among other factors.
A previous Board surmised that any ceiling should be set to give adequate flexibility for independent credit union operation. Therefore, a balance was needed to permit credit union management the flexibility to address the needs of credit union members. I agree completely. In fact, in doing my preparation for today’s board meeting, I requested the previous Board Action Memorandums and minutes from the 1980s to better understand the Board’s logic in moving the rate to 21 percent. We just received this information yesterday. I would personally like to thank the Board Secretary Melane Conyers-Ausbrooks and Venetia Eldridge, OGC Records Management Information Specialist, for going to the National Archives in College Park yesterday to gather these documents. It has been illuminating, and I am still digesting the information.
In any event, I have a question for the staff at this point: What analysis has NCUA done on state-chartered credit unions that charge higher than 18 percent? Do these credit unions pose any safety & soundness risks to the system and the National Credit Union Share Insurance Fund if they have a rate higher ceiling than currently set for federal charters?
Further, yesterday, the NCUA Board received a letter from NAFCU President and CEO Dan Berger. In the letter, Mr. Berger said, “Various data shows that state-chartered financial institutions subject to even lower permissible interest rate ceilings, such as Arkansas’s 17 percent interest rate ceiling, have been slower than others to raise their rates as benchmark interest rates pushed higher over the past year. And it can be enticing to conclude from these data, that those financial institutions’ borrowers are better off than they otherwise would be. However, during this period, most financial institutions subject to even lower permissible interest rate ceilings grew their unsecured lending portfolios at below-average rates. These financial institutions’ most well-qualified borrowers did, in fact, likely enjoy lower rates than they would have otherwise. On the other hand, these financial institutions’ inability to grow their unsecured lending portfolios during a time of the year when consumer credit card spending is particularly intense strongly suggests 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.”
I find this to be particularly insightful.
While the Board is acting on the proposal today to extend the 18 percent ceiling, which I support over the 15 percent cap, I appreciate the collaboration among Chairman Harper and Vice Chairman Hauptman to revisit this item in April once we will know if a variable interest rate is legal under the Federal Credit Union Act in addition to having additional information from staff to see if a 21 percent interest rate ceiling is warranted.
I do, however, acknowledge a variable rate could be complicated for credit unions, especially smaller credit unions, to implement. This is exactly why we need to seek stakeholder input on the concept. I am glad, with the Chairman and Vice Chairman’s leadership, to be studying the legality of a variable rate issue and get an opinion from OGC and potentially move forward with an advance notice of proposed rulemaking.
In closing, when you talk about the interest rate ceiling, we really need to think about how this impacts members. One credit union told me that their concern is that if the NCUA maintains the interest ceiling at 18 percent, as rates continue to rise, they would have to deny potential credit card applications unless the credit union member had an excellent credit score. This credit union said they would prefer serving those potential members while helping these members build better credit and reduce their interest rates. For members with no credit history or low credit scores, who are more often than not younger members with income below the average, credit unions may no longer be able to price for this type of risk under the current interest rate environment , based on risk-based pricing for credit cards under the 18 percent ceiling.
Regardless of the policy debate before us today, I think we can all agree that credit union members would be much better served by a credit union than a payday lender. As the NCUA Board noted in 1987, “restrictive interest rate ceilings would result in more stringent card issuance criteria.” That is exactly what we might see play out in the current environment.
I do have some additional questions:
- The way the PALs loan is structured, it would not be a replacement for an unsecured credit card, correct?
- Did the NCUA address the structural difference in the economics of the credit card business from the 1980s — until today, including consumers expectation of benefits? As we all know, I believe credit card rewards are much more generous than in the past, generally speaking.