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This podcast provides you the ability to listen to new regulatory guidance issued by the National Credit Union Administration, and occasionally the F D I C, the O C C, the F F I E C, or the C F P B. We will focus on new and material agency guidance, and historically important and still active guidance from past years that NCUA cites in examinations or conversations. This podcast is educational only and is not legal advice. We are sponsored by Credit Union Exam Solutions Incorporated. We also have another podcast called With Flying Colors where we provide tips for achieving success with the N C U A examination process and discuss hot topics that impact your credit union.
Samantha: Hello, this is Samantha Shares.
This episode covers N C U Aâs new
proposed rule on Federal Credit Union
Loan Interest Rate Ceiling voted
on at the July 18th Board Meeting.
The proposed rule passed
by a vote of 3 to 0.
The following is a word for
word real audio of that item.
This podcast is educational
and is not legal advice.
We are sponsored by Credit Union
Exam Solutions Incorporated, whose
team has over two hundred and
Forty years of National Credit
Union Administration experience.
We assist our clients with N C
U A so they save time and money.
If you are worried about a recent,
upcoming or in process N C U A
examination, reach out to learn how they
can assist at Mark Treichel DOT COM.
Also check out our other podcast called
With Flying Colors where we provide tips
on how to achieve success with N C U A.
And now the N C U A Board.
Chairman Todd Harper: The
last item of business today
is the Federal Credit Union.
Loan Interest Rate Ceiling.
Nagi Khalid, Director, Credit Markets
Division, Office of Examination Insurance,
will deliver the staff presentation.
And Amanda Parkhill, Deputy Director,
Office of Examination Insurance, will
join and actually will remain at the
table, uh, to answer any questions.
Good morning, Nagi, and
good morning, Amanda.
Nagi, please start whenever you're ready.
Staff 3: Good morning, Chairman
Harper, Vice Chairman Hoffman,
and Board Member Otsuka.
At the January 26, 2023 NCOA Board
meeting, the Board voted to continue
the temporary 18 percent interest rate
ceiling for loans made by federal credit
unions for a period of up to 18 months
based on the authority established
by the Federal Credit Union Act.
That temporary period is set to
expire on September 10, 2024.
We are here today to brief the Board on
our staff recommendation for where to set
the interest rate ceiling moving forward.
Following the expiration of the current
temporary interest rate ceiling.
Next slide please.
In 1934, Congress established a
12% loan interest rate ceiling for
loans made by Federal Credit Unions.
In March, 1980, the Monetary Control
Act through the Monetary Control Act,
Congress raised the interest rate ceiling
to 15% and authorized the NCA Board
to set a higher interest rate ceiling
when certain conditions are met for a
period of up to 18 months at a time.
In December of 1980, the Board raised
the interest rate ceiling to 21%, and
subsequently, the Board lowered the rate
ceiling to 18 percent in May of 1987.
And since then, the Board has voted
23 times to maintain the temporary 18
percent interest rate ceiling, and as
previously mentioned, was most recently
extended at the January 2023 Board
meeting through September 10th of 2024.
Next slide, please.
This slide represents the history
of the loan interest rate ceiling
since 1949 in comparison with the
movement of the bank prime rate.
The blue dash line in the, um, is the
Federal Credit Union loan interest
rate ceiling and the green smooth
line is the bank prime loan rate.
And since 1987, when the NCRA Board
first set the loan rate ceiling at 18
percent, spreads between the Federal
Credit Union loan interest rate
ceiling and the bank prime rate have
ranged from 650 to 1475 basis points.
with an average of 1190 basis points.
Currently, the spread is
about 950 basis points.
The Federal Credit Union Act includes
three requirements that must be satisfied
for the Board to raise the loan interest
rate ceiling above 15 percent for periods
not to exceed 18 months at a time.
First, the Board must consult
with appropriate committees of
Congress and a number of appropriate
external agencies on the changes.
The board must also determine that
the money market interest rates have
risen over the preceding six months.
And finally, the Board must determine that
the prevailing interest rates threaten the
safety and soundness of individual credit
unions, as evidenced by adverse trends in
liquidity, capital, earnings, and growth.
Next slide, please.
As mentioned earlier, the Act requires the
NCOA to send notifications to appropriate
committees of Congress, the Department
of Treasury, And the Federal Financial
Institution Regulatory Agencies, the NCA
sent those consultation letters in April
of 2024, and they included the Secretary
of the Treasury, the Chairman of FRB,
the Comptroller of the Currency, and
the Chairs and Ranking Members of the
Senate Committee on Banking, Housing,
and Urban Affairs, Thank you very much.
and the House Committee
on Financial Services.
Next slide, please.
The second requirement noted is that
the Board must determine that money
market interest rates have risen over
the preceding six months, and as shown
on the table on this slide, the money
market interest rates increased between
October 31st of 2023 and April 30th of
2024, as evidenced by the changes over
that period, You To both the average
money market deposit rates and the 180 day
average secured overnight financing rate.
The changes vary from 13 to
21 basis points for those
selected money market rates.
Next slide, please.
The Federal Credit Union Act also
mandates that the Board must determine
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.
NCAA staff conducted an assessment
of the interest rate ceiling's
impact on safety and soundness.
And as of December 31st of 2023, There
were 2, 159 credit unions, or about
75, uh, federal credit unions, excuse
me, or about 75 percent of the total
population of federal credit unions that
had issued loans with rates above 15%.
And loan balances with rates
above 15 percent totaled about 42.
6 billion, and these loans carried
an average loan rate of 17.
31%.
The table on this slide summarizes this
information and shows the breakdown
of these federal credit unions
that have a low income designation.
A minority deposit insurance
designation, or are certified as
community deposit, um, community
development financial institutions.
It also shows the federal credit
unions that have a concentration
rate of above 10% of total assets
in loans with rates above 15%.
Next slide, please.
Given the prevailing interest rates,
NCUA staff estimates that a reversion
to the statutory loan interest rate
ceiling would threaten the safety and
soundness of as many as 1, 139 federal
credit unions, given the impact to
one or more areas of performance.
well, and liquidity capital earnings and
growth, which are the four risk categories
outlined in the federal credit union act.
The table on this slide shows how
many categories were triggered for
the eleven hundred and thirty nine
federal credit unions meeting at
least one of those risk criteria.
And as of December thirty first 37
billion or about 87 percent of loan
balances with interest rates greater
than 15 percent were held by these 1139
federal credit unions collectively with
an average interest rate of about 17.
35 percent for those loans
with rates above 15%.
If the interest rate ceiling were
to revert to 15%, a 235 basis point
reduction in average loan interest
rates could lead to as much as 873
of lost future annual interest income
for those federal credit unions.
The adverse impact would be particularly
pronounced for 273 federal credit
unions that are already struggling
with negative earnings, 37 federal
credit unions with low net worth ratios
and 49 credit unions with greater
than 10 percent of their assets and
loans with rates greater than 15%.
Next slide, please.
Since 1987, when the NCA Board first
set the loan interest rate ceiling at
18%, the spreads between the Federal
Credit Union loan interest rate ceiling
and the prime rate have ranged from 6.
5 percent, 6.
50 percentage points and 14.
75 percentage points.
And currently, as noted priorly,
uh, uh, in, in prior slides, the 9.
5 percentage point spread between
the current loan rate ceiling of 18
percent and the current prime rate
is still sufficient to support loan
pricing needs in Federal Credit Unions.
Overall, Federal Credit Unions maintain
sound performance during 2023 with the
current 18 percent loan rate ceiling.
NCUA staff assess that in the current
environment, an 18 percent loan interest
rate ceiling provides federal credit
unions with sufficient risk pricing
ability to manage liquidity, capital,
earnings, and growth, and protects
member access to safe and affordable
credit, and does not require federal
credit unions to incur any additional
operational burden or costs associated
with a change to the loan rate ceiling.
Next slide, please.
In addition to the statutory
considerations, NCA staff also
assessed the interest rate ceilings
impact on a program integral to a
lot of members, which is the Payday
Alternative Loans Program, or PALS.
The PALS program provides federal credit
unions with diversification in their
loan portfolios, but more importantly,
it provides a better alternative to
payday lenders for tens of thousands
of members who need it the most.
The current interest rate ceiling on
the PALS program is 28 percent, which is
determined by adding 1, 000 basis points.
to the interest rate ceiling
when the NCOA sets a higher than
15 percent loan rate ceiling.
However, if the Federal Credit
Union loan rate ceiling reverts
back to the 15 percent statutory
limit, the maximum allowable PALS
rate would also fall back to 15%.
Next slide.
Oh, no, excuse me.
Same slide.
Um, allowing the loan rate ceiling
to revert to 15 percent would
constrain a Federal Credit Union's
ability to apply risk based pricing
for borrowers who currently take
advantage of the PALS program.
And more importantly, reversion of
the interest rate ceiling could lead
to the elimination of PALS lending
if Federal Credit Unions can't price
these loans appropriately for the risk.
And this could result in tens of
thousands of Federal Credit Union members
being driven to other, more expensive
lenders to meet their borrowing needs.
Next slide, please.
In summary, staff recommends the NCOA
Board establish a temporary maximum
loan interest rate ceiling of 18 percent
for the 18 month period effective
September 11, 2024 to March 10, 2026.
Next slide, please.
This concludes our presentation.
Thank you for your time this
morning and we'd be happy to
answer any questions you have.
Chairman Todd Harper: Thank you, Nagi,
for the work of you and your team on
the reconsideration of the Federal
Credit Union loan interest rate ceiling.
I appreciate all your efforts in bringing
the interest rate ceiling for Federal
Credit Unions before the NCUA Board today,
and thank you, Amanda, for being here to
answer any questions that we might have.
As noted in the presentation, the NCUA
Board in January 2023 last authorized
an 18 percent ceiling or the loan
interest rate for federal credit unions
effective through September 10, 2024.
If the NCUA Board does not act today,
the maximum interest rate for federal
credit unions The rate of interest
that they may charge will revert
to 15 percent on September 11th.
Specifically, the Federal Credit Union
Act requires that the rate of interest
a Federal Credit Union can charge
may not exceed 15 percent annually.
But in setting the statutory ceiling,
Congress also incorporated a regular
review process or an escape hatch,
if you will, for the NCWA Board to
reconsider the ceiling and adjust
it under certain conditions after
following certain procedures.
Specifically, the board may for
a period not to exceed 18 months
determine to exceed the statutory 15
percent ceiling after completing the
required consultations, reviewing the
interest rate environment and market
conditions, and completing certain
assessments required by the law.
Here, the NCOA team conducted a really
thorough analysis of recent market
and financial conditions and concluded
that money market rates have risen
over the preceding six month period.
That fact should come as no surprise
to anyone who has monitored our
financial markets and the recent
decisions of the Federal Reserve
Board's Federal Open Market Committee.
The NCOA team also completed its
required consultation with Congress,
the other federal banking agencies.
and the Treasury Department.
I also believe we received
no comments back on that.
Am I correct on that?
Staff 3: That's correct.
Chairman Todd Harper: Finally, the NCUA
team determined whether the prevailing
interest rate levels threaten the
safety and soundness of individual
credit unions with respect to liquidity,
capital, earnings, and growth.
That analysis concluded that lowering
the interest rate ceiling below 18
percent would indeed be detrimental
to a certain number of credit unions.
I want to pause here, because am
I correct in assuming that most of
those credit unions it's because
of their credit card portfolios?
Home loans certainly aren't at
18 percent, or anywhere near it.
Uh, home equity lines of
credit aren't at that rate.
Uh, is this primarily a credit card issue?
Staff 3: Unsecured loans,
primarily credit cards and other
personal unsecured loans, correct?
Chairman Todd Harper: That's helpful.
To that end, the NCUA experts have
recommended that the NCUA Board vote
to temporarily establish a maximum loan
interest rate ceiling of 18 percent for
the 18 month period effective September
11, 2024 through March 10, 2026.
I agree with this recommendation
and will vote for this item.
Before closing, we must always remember
who ultimately feels the effects of
these interest rate ceiling decisions.
The Credit Union System's statutory
mission is to support the credit
and savings needs of all Americans,
especially those of modest means, and
it's those American households that
are under increasing financial stress
from financial pressures the NCUA would
place under additional stress if we
were to raise the interest rate ceiling.
And the NCUA should not cause
unnecessary safety and soundness
risks for federal credit unions by
inappropriately lowering the rate.
This balanced decision is the right
one to protect the financial prospects
of those who use the credit union
system and ensure that the credit
union system remains safe and sound.
That concludes my remarks.
I now hand it over to the Vice Chairman.
Vice Chairman Kyle Hauptman:
Thank you, sir.
Thank you guys for the,
uh, detailed analysis.
So, just to review the history,
1980, that's the most important
year in this entire discussion.
In 1980, they passed the Monetary
Control Act, which raised it from
15 to 12, as the Chairman said,
the maximum rate we could charge.
They've been 12 percent
all through the 70s.
And Congress also gave some
discretion for certain reasons.
The only number in the Federal
Credit Union Act, the only
interest rate, is 15, right?
One, five, kinsei, jyugo in Japanese.
That's it.
It's the only number in there.
If you recall, why did this happen?
Okay, and that's what
drives our decision today.
Because the Volcker Fed was raising
rates to unprecedented levels.
1980, the prime rate, 21,
uh, at the time it was 20.
5.
Later that year it hit 21 point, uh, 21.
5.
Um, the Fed rate was a range of 19 to 20.
Back then they had a one point range.
And so they understood that it was
impossible to extend any credit.
The Fed rates basically
were banks borrow overnight.
You're never going to borrow from a
bank cheaper than the bank can borrow.
That's why it's such short term rates.
So immediately after the Monetary
Control Act was passed in 1980, the
board raised it to a maximum, to 21%,
where it remained for a few years.
Okay, and this was done hand in hand
with Congress and, uh, both anybody that
had a price cap back then was talking to
Congress and that resulted in this bill.
So this is Congress's
intent, the best we can tell.
We know at a time where the prime
rate at the time of passing it was 20.
5, that the 21 percent that NCUA put
it at was adequate and did not back,
um, and was supported by Congress.
So 21 percent when the prime rate was 20.
5 and the Fed, uh, was a range
of 19 That's the context here.
So as the Chairman said, uh, to raise
the rate any time above 15, consultation
with Congress, money market rates have
risen over the last six months, prevailing
interest rates, uh, and that prevailing
interest rates threaten the safety and
soundness of individual credit units.
Uh, if the Board does not act
today, the maximum rate reverts
back to the maximum of 15.
The last time we addressed the interest
rate, the Board requested an analysis
from the General Counsel on whether
a variable rate would be legal.
Although it was determined to
be legal, and I personally think
economically it's the smartest one.
Let it move with markets, not
with what the board decides to do.
But for one thing, any variable rate
that we could possibly enact would
mean a maximum rate well below 15.
I assure you the people arguing
with us would not, uh, be quiet if
we had a maximum rate on anything
unsecured at 12%, let's say, okay?
I don't believe at NCUA we could legally
use a variable rate that would say the
prime rate or even the Fed's overnight
rate plus another 15, 16%, right?
16 percent plus the Fed's overnight rate
today already puts you over the 21%.
That they did in 1980, when the
prime rate was 20 and a half.
It doesn't even make any sense.
So, to everyone who objects to our
current rate cap, what we're voting
for today, and I'm going to vote for
it, this is a matter for Congress.
Once someone reads the actual law
that we at the NCUA will follow,
they arrive at the same conclusion.
It's a matter for Congress, not NCUA.
We're only here to do what
Congress tells us to do.
We're not here to decide what
interest rate cap is ideal.
I say this because many of the people
who've argued for higher rates are not
aware of what Intuit is told to do.
There's only two kinds of people.
People who argue for things like prime
plus 15 and people who've read the act.
Almost every time I ask somebody,
all right, well, if you were in
our shoes, what would you do?
What would be your policy?
It's usually variable.
Again, that's a smarter way to do it.
Um, I said, what would you implement?
The answer I get is
always one that's illegal.
I'll mention that I'm aware
of the negative effects of
government price shedding.
I don't need to be told about that.
I agree with it.
I'm aware that it's usually the least
of these that get harmed when government
interferes in market prices, that
people are going to go to other lending
sources or not have a credit card.
It's hard to operate in
America without a credit card.
And I know you can't even issue one
to some people, uh, if, given their
risk profile, if the, um, Cap is 18.
Uh, currently we, we do not
have evidence, if you go back to
1980, that resembles that period.
Okay?
Um, but of course there are signals that
lowering it would threaten the safety
and soundness of individual credit units.
The 18 percent ceiling provides low
income and CDFI credit units some
headroom above the statutory rate
of 15, and of course that means 10
percent above that is a PALS loan.
For some low income, uh, community
and CDFI credit units, It could
be most of their membership
that would get walloped here.
Uh, with that said, this
is a question for you.
Uh, if the rate were allowed to revert
to 15%, can you discuss how many credit
unions would be impacted from a safety
and soundness perspective, and what
portion would be low income MDI or CDFI?
Staff 3: Certainly, so about 1, 139
federal credit unions would be impacted
from a safety and soundness perspective
to any one or combination of the risk
categories defined in the statute.
And of those, about two thirds or about
759 federal credit unions either have
a low income or MDI designation or
are certified as CDFI institutions.
1, 100 something, that's
Vice Chairman Kyle Hauptman: ballpark a
quarter of the credit unions in America.
Okay, and then the majority of those
are low income MDI or CFI, right?
Okay.
Uh, just an interesting footnote.
I think partly to some entrepreneurs out
there, some technology has helped that
the PALS loans, which were never feasible
for lender or buyer in most cases,
they've made Some entrepreneurs, some
private businesses have created technology
to make it a little more feasible.
So we've seen Increased in outstanding
PALS, both the number, let's see, 18
month period ending last December.
Balance of PALS went from
84 million to 120 million.
That's over 40 percent.
The number of them went from 111, 000.
That's 35 percent.
Um, so that is an interesting,
um, uh, note in all of this.
Um, that concludes my remarks.
I have no further questions.
Thank you.
Board Member Otsuka.
Board Member Tanya Otsuka:
Thank you, Chair Harper.
Um, and thank you, Nagi and
Amanda, and thank you to all the
staff who've been working on this.
Um, from 1987 until now, you know, there
have been economic downturns, including
recession, high inflation, the pandemic.
Yet the credit union system has
been able to grow with an interest
rate ceiling of 18 percent.
Um, you know, my colleagues
have kind of gone through, uh,
some of the history on that.
At the end of 1987, our system
of cooperative credit totaled
160 billion dollars in assets.
Today, as of March 2024, our
credit union system has 2.
3 trillion dollars in assets.
This is evidence that credit unions can
thrive while providing their members
access to credit at the same time.
These reasonable rates Congress
established specific statutory
requirements that the board must consider
before setting the rate ceiling above
15 percent Staffs analysis and due
diligence consistent with the statute
supports keeping the interest rate
ceiling at 18 percent Only in 1980 when
inflation peaked at fourteen point six
percent far higher than it is today
Did the NC way board raise the interest
rate ceiling to twenty one percent?
You know, today, at the same time,
loan portfolio data from our call
reports indicates that consumers
are already feeling squeezed.
So, talking about the borrowers here,
between quarter 1 2023 and quarter 1
2024, credit card balances grew by 6.
6 billion or 9%.
to 80, uh, 80.
8 billion.
This is more concerning when
coupled with the fact that credit
card delinquency rate rose by 54
basis points during the last year.
Furthermore, the delinquency rate
for the other major loan products
offered by credit unions, such
as auto loans, residential real
estate, are also increasing 21
and 19 basis points, respectively.
So um, Nagi and Amanda, um, do you,
Do you anticipate that raising the
interest rate ceiling to 21 percent
could cause the delinquency rate across
loan products to further increase?
And I know in other board meetings
and briefings, we've, we've talked
about, um, you know, how you guys
are watching delinquency rates.
Staff 3: So I can address that
question, uh, Board Member Roscoe.
So, and I'll address it from
a borrowing perspective.
So, with a higher interest rate
ceiling, loans could become more
expensive for borrowers and leading to
potentially increased monthly payments.
And those borrowers, you mentioned,
are already financially stretched, may
struggle to keep up with higher payments,
which could potentially result in higher
delinquency rates, particularly in a
challenging economic environment where
rising costs and inflation, especially
if the unemployment rate also increases.
There are other influencing factors also
to keep in mind that could potentially
also have an impact on the delinquency
rates, and that's the credit union's
underwriting practices and their
assessment of a member's ability to repay,
the loan terms and conditions and how
those correlate to a borrower's capacity
and, and the general economic conditions.
In generally in a strong economic
environment, borrowers may, may be
able to manage higher payments better.
But in weaker economies, even a
modest increase in loan payments
could potentially exacerbate
financial conditions for members.
Okay.
Board Member Tanya Otsuka:
That concludes my response.
Thank you.
Um, and how would in, right, how would
raising the interest rate ceiling to
21 percent affect credit unions members
ability to gain access to affordable
credit, and I think your, actually your
response kind of touched a little bit
on this, um, and affect their mission to
provide credit to those in modest needs?
Staff 3: Certainly.
So, so I'll address it from two points.
Raising the ceiling could theoretically
allow credit unions to enhance their
ability to better, um, is, is a
chairman's office in Washington DC.
And he provides the credit for the
transcript, uh, in a way called
the Transcriptional Advocacy Bill.
And the Transcriptional Advocacy Bill is a
bill that provides the federal government
and the federal agency to provide specific
funding in advance for the concept
of a transcriptional And particularly
in an inflationary environment where
cost of living is already rising
could make credit less affordable
and potentially stretch the financial
resources of lower income members
or those who are already struggling.
Okay.
Closing my response.
Board Member Tanya Otsuka: Thank you.
Thank you.
Um, yeah, I think it's important to
remember that, you know, credit unions
are not for profit organizations,
uh, whose main mission is to provide
credit and financial services to
communities that need it the most.
You know, and instead of aiming to
achieve a particular profit margin or
satisfying shareholder interest, this
mission is really core What credit
unions do, and that should be the most
important consideration for credit unions.
Um, but I think at the same time, you
know, I think we understand, right,
as we've, as we've discussed, um,
the economic conditions, at the one
time, the NCOA board has raised the
interest rate ceiling far, far higher.
Far higher.
Inflation is far higher
than it is even today.
And there are much more positive
signs today than there were back then.
We're talking about a very different
economic environment when the NCUA
board raised the ceiling to 21%.
Um, so for these reasons, I
support maintaining the interest
rate loan ceiling at 18%.
This rate provides more flexibility
above the threshold that Congress
established, and it also allows credit
unions to grow while still being able
to provide credit at a competitive rate
compared to other financial institutions.
Um, so thank you, Chair
Harper and Vice Chair Hopman.
Um, thank you to the staff, and
I'll turn it back over to you.
Chairman Todd Harper: Thank you so much.
Vice Chairman Haltman, is there a motion?
Vice Chairman Kyle Hauptman: Yes, sir.
I move that the board approve maintaining
the current 18 percent maximum loan
interest rate for federal credit
units effective September 11, 2024
through March 10, 2026 as detailed
in the board action memorandum.
Is there a second?
Board Member Tanya Otsuka: Second.
Chairman Todd Harper: There
is a sufficient second.
All those in favor say aye.
Aye.
Board Member Tanya Otsuka: Aye.
Chairman Todd Harper: Aye.
All those opposed say nay.
The ayes have it and let the record show
that the motion passes three to zero.
Samantha: This concludes this item.
If your Credit union could use assistance
with your exam, reach out to Mark Treichel
on LinkedIn, or at mark Treichel dot com.
This is Samantha Shares and
we Thank you for listening.