As Prepared for Delivery on January 26, 2023
Thank you, John, for your presentation. And, thank you Justin, Tom, and Amanda, for being available to answer questions. I appreciate all your efforts in bringing the interest rate ceiling for federal credit unions before the NCUA Board for consideration today.
To start, I want to note that if we don’t act today, the maximum interest rate that federal credit unions may charge will revert to 15 percent on March 11. That’s just six weeks away, so time is of the essence.
As noted in today’s presentation, the 18-percent maximum loan interest rate ceiling for federal credit unions has remained unchanged since 1987. During that period, there have been four recessions, including the Great Recession, periods of economic prosperity, market disruptions, financial crises, a global pandemic, a number of NCUA Board compositions, and various cycles of rising and declining interest rates. Also, over this time, the credit union system has grown tremendously, from an industry with $160 billion in assets at the end of 1987 to one with more than $2.1 trillion in assets today.1
In acting today, I think it’s fair to say that all three Board members are uncomfortable in their voting position. We also view this issue in three different ways. Moreover, the views on whether to maintain the current interest rate ceiling, increase it, or adopt some new methodology are strong and varied. For example, the NCUA Board in recent weeks has heard frequently from industry trade groups and individual credit unions. Generally, they want the ceiling raised to 21 percent or modified to become a floating ceiling. And, in our consultative process with other government bodies required by the Federal Credit Union Act, we heard from stakeholders who want the maximum loan interest rate for federal credit unions to remain at the current 18 percent.
In our discussions with all these parties, we have also heard arguments related to competitiveness, consumer financial protection, access to credit, and safety and soundness. So, we — as a Board and decisionmakers — are now placed between these competing viewpoints.
As I’ve worked through this issue, I’ve frequently flipped through the Federal Credit Union Act. That law states that the rate of interest a federal credit union can charge may not exceed 15 percent annually. But, in setting this statutory ceiling, Congress also incorporated a relief valve to allow for the NCUA Board to adjust that ceiling under certain conditions and following certain procedures.
Specifically, the NCUA Board may for a period not to exceed 18 months determine to exceed the statutory 15-percent rate ceiling after consulting with Congress, the Treasury Department, and other federal financial services regulators. We must also review the interest rate environment and market conditions.
With today’s vote, the NCUA Board will authorize an 18-percent maximum loan interest rate for federal credit unions, effective March 11, 2023, through September 10, 2024. That said, nothing in the Federal Credit Union Act precludes the NCUA Board from acting on the interest rate ceiling earlier than 18 months. So, I commit to my fellow Board members to continue to review this matter on a rolling basis, not a one-and-done 18-month timeframe.
Before reaching this decision to keep the current interest rate ceiling in place, NCUA staff analyzed recent market and financial conditions. Their analysis concluded that money market rates have indeed risen over the preceding six-month period. That fact comes as no surprise to anyone who has closely monitored our financial markets and the recent decisions by the Federal Open Market Committee to increase the Federal Funds Rate. The staff’s analysis also concluded that lowering the interest rate ceiling below 18 percent would threaten the safety and soundness of credit unions.
So, what must we as a Board consider when deciding to increase the maximum loan interest rate? As I noted earlier, some in the industry contend the NCUA Board should raise the maximum loan rate to keep credit unions competitive with community banks. Competitiveness, however, is not the standard outlined in the Federal Credit Union Act. Instead, the NCUA Board is charged with determining whether 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.” And, as I noted earlier, there is not compelling data at this time that shows that such safety-and-soundness issues exist.
From my perspective, adjusting the maximum loan interest rate higher would place additional burdens on credit union member budgets already stretched thin by inflation and tighter credit conditions. We know that the credit card debt of American households has increased by nearly 30 percent over the last year.2 And, in recent months, several companies across a variety of economic sectors have announced layoffs and closures. What’s more, another survey of middle-income wage earners showed that nearly 75 percent of families reported earnings falling behind the cost of living, up from 68 percent a year ago.3
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. We, therefore, ought to move carefully before acting.
Additionally, those who contend that a floating interest rate ceiling is the best path forward raise an interesting point. But, it is also a complex issue, and we can’t just snap our fingers or blink our eyes to make it happen. We first need to determine whether it is legally permissible. If so, we then need to carefully think through the policy issues. How would a floating cap work? Would the Board need to continue to vote every 18 months to maintain the floating rate? What metric is best on which to base the floating rate? Once we determine the metric, should that floating rate be 400, 800, or 1,000 basis points higher than the metric?
There’s another important policy issue to explore here. That is the interplay between the interest rate ceiling set by the NCUA Board and the rules and requirements of other agencies. For example, the Defense Department’s Military Lending Act rules provide a safe harbor for the NCUA’s initial Payday Alternative Loan rule, which has a maximum rate of 1,000 basis points above the ceiling set by the NCUA Board. That’s currently 28 percent. More than 500 federal credit unions currently use the PALs program, but if the rate moved closer to the maximum 36 percent allowed under the Military Lending Act, would credit unions lose that safe harbor, and would we need to rewrite our PALs program rules?
None of these policy questions and concerns is insurmountable, but they each will require careful and deliberative action if the legal analysis first determines that it’s possible to use a floating interest rate ceiling. Such work could take us many, many months to complete.
In holding the line on the interest rate ceiling for now, there is one other point to raise. We have a precedent. Back in May 2021, this same Board faced a similar situation when it came to the Share Insurance Fund’s equity ratio. A massive inflow of share deposits at the start of the pandemic quickly drove down the equity ratio, and that ratio teetered precariously near the statutory level requiring the NCUA Board to adopt a restoration plan. Because the data was fuzzy, we waited a quarter or two before determining which path to pursue. Ultimately, the equity ratio rose, and there was no need to draft and implement a restoration plan. Something similar may happen here.
Even though the maximum interest rate for federal credit union loans will remain unchanged at 18 percent with our action today, I encourage all credit unions to offer their members lower rates whenever possible. And, I know that many already do. With respect to credit cards, a federal credit union could lower its rates by offering its members a classic card without rewards. I also encourage federal credit unions to develop affordable loan products that include a savings feature. Providing members with a way to save during difficult financial times will help them better manage financial emergencies that might otherwise cause them to go to payday lenders.
In closing, keeping in place the current maximum interest rate on federal credit union loans for another 18 months is prudent and grounded in sound reasoning. Everyone involved in making this decision today may be uncomfortable for their own reasons, but the NCUA Board can act sooner than 18 months if conditions warrant. So, we will continue to monitor the financial markets and the interest rate environment to determine whether the tests contained in the Federal Credit Union Act are met. If so, then we can consult with others as required by law. And, we can, in the meantime, begin exploring the legal and policy issues related to a floating interest rate ceiling.
Thank you again, John, Justin, Tom, and Amanda, for your hard work on this issue. That concludes my remarks. I now recognize Vice Chairman Hauptman.
1 NCUA’s Annual Report to Congress, 1987, available at https://www.ncua.gov/files/annual-reports/AR1987.pdf (opens new window) and Quarterly Data Summary for the third quarter of 2022, available at https://www.ncua.gov/files/publications/analysis/quarterly-data-summary-2022-Q3.pdf (opens new window).
2 Daniel De Visé, “A growing number of Americans face potentially crippling credit-card debt,” The Hill, January 21, 2023. Available at https://thehill.com/policy/finance/3821799-a-growing-number-of-americans-face-potentially-crippling-credit-card-debt/ (opens new window) (You will be leaving NCUA.gov and accessing a non-NCUA website. We encourage you to read the NCUA's exit link policies. (opens new page).) .
3 Jessica Dickler, “Amid inflation, more middle-class Americans struggle to make ends meet,” CNBC, published on January 18, 2023. Available at https://www.cnbc.com/2023/01/18/amid-inflation-more-middle-class-americans-struggle-to-make-ends-meet.html (opens new window) (You will be leaving NCUA.gov and accessing a non-NCUA website. We encourage you to read the NCUA's exit link policies. (opens new page).)