WEBVTT NOTE This file was generated by Descript 00:00:00.470 --> 00:00:02.310 Samantha: Hello, this is Samantha Shares. 00:00:02.920 --> 00:00:07.420 This episode covers N C U A’s new proposed rule on Federal Credit Union 00:00:07.420 --> 00:00:11.360 Loan Interest Rate Ceiling voted on at the July 18th Board Meeting. 00:00:11.900 --> 00:00:14.750 The proposed rule passed by a vote of 3 to 0. 00:00:15.521 --> 00:00:18.571 The following is a word for word real audio of that item. 00:00:19.071 --> 00:00:22.251 This podcast is educational and is not legal advice. 00:00:22.681 --> 00:00:26.661 We are sponsored by Credit Union Exam Solutions Incorporated, whose 00:00:26.661 --> 00:00:29.791 team has over two hundred and Forty years of National Credit 00:00:29.791 --> 00:00:31.611 Union Administration experience. 00:00:32.111 --> 00:00:35.801 We assist our clients with N C U A so they save time and money. 00:00:36.321 --> 00:00:40.281 If you are worried about a recent, upcoming or in process N C U A 00:00:40.281 --> 00:00:44.661 examination, reach out to learn how they can assist at Mark Treichel DOT COM. 00:00:44.991 --> 00:00:49.331 Also check out our other podcast called With Flying Colors where we provide tips 00:00:49.331 --> 00:00:51.911 on how to achieve success with N C U A. 00:00:52.636 --> 00:00:54.226 And now the N C U A Board. 00:00:54.566 --> 00:00:56.266 Chairman Todd Harper: The last item of business today 00:00:56.936 --> 00:00:58.386 is the Federal Credit Union. 00:00:58.716 --> 00:01:00.186 Loan Interest Rate Ceiling. 00:01:00.186 --> 00:01:05.236 Nagi Khalid, Director, Credit Markets Division, Office of Examination Insurance, 00:01:05.286 --> 00:01:07.376 will deliver the staff presentation. 00:01:07.786 --> 00:01:11.866 And Amanda Parkhill, Deputy Director, Office of Examination Insurance, will 00:01:11.866 --> 00:01:16.646 join and actually will remain at the table, uh, to answer any questions. 00:01:16.956 --> 00:01:19.676 Good morning, Nagi, and good morning, Amanda. 00:01:19.726 --> 00:01:21.686 Nagi, please start whenever you're ready. 00:01:21.821 --> 00:01:24.961 Staff 3: Good morning, Chairman Harper, Vice Chairman Hoffman, 00:01:24.991 --> 00:01:25.951 and Board Member Otsuka. 00:01:27.401 --> 00:01:33.201 At the January 26, 2023 NCOA Board meeting, the Board voted to continue 00:01:33.201 --> 00:01:37.461 the temporary 18 percent interest rate ceiling for loans made by federal credit 00:01:37.461 --> 00:01:41.831 unions for a period of up to 18 months based on the authority established 00:01:41.831 --> 00:01:43.101 by the Federal Credit Union Act. 00:01:44.071 --> 00:01:47.721 That temporary period is set to expire on September 10, 2024. 00:01:48.491 --> 00:01:52.181 We are here today to brief the Board on our staff recommendation for where to set 00:01:52.181 --> 00:01:53.571 the interest rate ceiling moving forward. 00:01:53.941 --> 00:01:57.091 Following the expiration of the current temporary interest rate ceiling. 00:01:57.661 --> 00:01:58.441 Next slide please. 00:02:00.911 --> 00:02:05.321 In 1934, Congress established a 12% loan interest rate ceiling for 00:02:05.326 --> 00:02:07.091 loans made by Federal Credit Unions. 00:02:07.711 --> 00:02:12.521 In March, 1980, the Monetary Control Act through the Monetary Control Act, 00:02:12.551 --> 00:02:17.071 Congress raised the interest rate ceiling to 15% and authorized the NCA Board 00:02:17.071 --> 00:02:20.821 to set a higher interest rate ceiling when certain conditions are met for a 00:02:20.821 --> 00:02:22.322 period of up to 18 months at a time. 00:02:23.531 --> 00:02:28.551 In December of 1980, the Board raised the interest rate ceiling to 21%, and 00:02:28.551 --> 00:02:33.131 subsequently, the Board lowered the rate ceiling to 18 percent in May of 1987. 00:02:33.911 --> 00:02:37.971 And since then, the Board has voted 23 times to maintain the temporary 18 00:02:38.151 --> 00:02:41.881 percent interest rate ceiling, and as previously mentioned, was most recently 00:02:41.881 --> 00:02:46.841 extended at the January 2023 Board meeting through September 10th of 2024. 00:02:47.586 --> 00:02:48.236 Next slide, please. 00:02:52.026 --> 00:02:54.716 This slide represents the history of the loan interest rate ceiling 00:02:54.716 --> 00:02:58.596 since 1949 in comparison with the movement of the bank prime rate. 00:02:59.316 --> 00:03:03.136 The blue dash line in the, um, is the Federal Credit Union loan interest 00:03:03.136 --> 00:03:06.566 rate ceiling and the green smooth line is the bank prime loan rate. 00:03:07.246 --> 00:03:11.946 And since 1987, when the NCRA Board first set the loan rate ceiling at 18 00:03:11.946 --> 00:03:15.256 percent, spreads between the Federal Credit Union loan interest rate 00:03:15.256 --> 00:03:21.656 ceiling and the bank prime rate have ranged from 650 to 1475 basis points. 00:03:22.136 --> 00:03:24.416 with an average of 1190 basis points. 00:03:25.156 --> 00:03:28.056 Currently, the spread is about 950 basis points. 00:03:31.876 --> 00:03:35.686 The Federal Credit Union Act includes three requirements that must be satisfied 00:03:35.786 --> 00:03:40.086 for the Board to raise the loan interest rate ceiling above 15 percent for periods 00:03:40.136 --> 00:03:42.076 not to exceed 18 months at a time. 00:03:42.726 --> 00:03:45.706 First, the Board must consult with appropriate committees of 00:03:45.706 --> 00:03:50.026 Congress and a number of appropriate external agencies on the changes. 00:03:51.206 --> 00:03:54.806 The board must also determine that the money market interest rates have 00:03:54.806 --> 00:03:56.676 risen over the preceding six months. 00:03:57.011 --> 00:04:01.431 And finally, the Board must determine that the prevailing interest rates threaten the 00:04:01.431 --> 00:04:06.171 safety and soundness of individual credit unions, as evidenced by adverse trends in 00:04:06.171 --> 00:04:08.981 liquidity, capital, earnings, and growth. 00:04:09.601 --> 00:04:10.331 Next slide, please. 00:04:13.501 --> 00:04:17.451 As mentioned earlier, the Act requires the NCOA to send notifications to appropriate 00:04:17.451 --> 00:04:21.366 committees of Congress, the Department of Treasury, And the Federal Financial 00:04:21.366 --> 00:04:26.376 Institution Regulatory Agencies, the NCA sent those consultation letters in April 00:04:26.386 --> 00:04:31.596 of 2024, and they included the Secretary of the Treasury, the Chairman of FRB, 00:04:31.926 --> 00:04:35.626 the Comptroller of the Currency, and the Chairs and Ranking Members of the 00:04:35.766 --> 00:04:38.116 Senate Committee on Banking, Housing, and Urban Affairs, Thank you very much. 00:04:38.446 --> 00:04:40.366 and the House Committee on Financial Services. 00:04:41.076 --> 00:04:41.776 Next slide, please. 00:04:43.816 --> 00:04:46.976 The second requirement noted is that the Board must determine that money 00:04:46.976 --> 00:04:50.766 market interest rates have risen over the preceding six months, and as shown 00:04:50.766 --> 00:04:54.226 on the table on this slide, the money market interest rates increased between 00:04:54.266 --> 00:05:00.386 October 31st of 2023 and April 30th of 2024, as evidenced by the changes over 00:05:00.386 --> 00:05:05.646 that period, You To both the average money market deposit rates and the 180 day 00:05:05.696 --> 00:05:07.946 average secured overnight financing rate. 00:05:08.746 --> 00:05:12.006 The changes vary from 13 to 21 basis points for those 00:05:12.006 --> 00:05:13.396 selected money market rates. 00:05:14.076 --> 00:05:14.886 Next slide, please. 00:05:17.426 --> 00:05:20.616 The Federal Credit Union Act also mandates that the Board must determine 00:05:20.696 --> 00:05:24.216 that the prevailing interest rate levels threaten the safety and soundness of 00:05:24.216 --> 00:05:28.206 individual credit unions as evidenced by adverse trends in liquidity, 00:05:28.386 --> 00:05:30.176 capital, earnings, and growth. 00:05:30.176 --> 00:05:33.856 NCAA staff conducted an assessment of the interest rate ceiling's 00:05:33.856 --> 00:05:35.306 impact on safety and soundness. 00:05:35.906 --> 00:05:41.716 And as of December 31st of 2023, There were 2, 159 credit unions, or about 00:05:41.716 --> 00:05:45.586 75, uh, federal credit unions, excuse me, or about 75 percent of the total 00:05:45.606 --> 00:05:49.236 population of federal credit unions that had issued loans with rates above 15%. 00:05:50.466 --> 00:05:53.476 And loan balances with rates above 15 percent totaled about 42. 00:05:53.476 --> 00:05:59.036 6 billion, and these loans carried an average loan rate of 17. 00:05:59.046 --> 00:05:59.886 31%. 00:06:01.016 --> 00:06:04.516 The table on this slide summarizes this information and shows the breakdown 00:06:04.616 --> 00:06:07.496 of these federal credit unions that have a low income designation. 00:06:07.931 --> 00:06:11.351 A minority deposit insurance designation, or are certified as 00:06:11.351 --> 00:06:14.891 community deposit, um, community development financial institutions. 00:06:16.011 --> 00:06:19.161 It also shows the federal credit unions that have a concentration 00:06:19.161 --> 00:06:23.781 rate of above 10% of total assets in loans with rates above 15%. 00:06:24.821 --> 00:06:25.601 Next slide, please. 00:06:28.306 --> 00:06:32.236 Given the prevailing interest rates, NCUA staff estimates that a reversion 00:06:32.246 --> 00:06:35.566 to the statutory loan interest rate ceiling would threaten the safety and 00:06:35.606 --> 00:06:40.336 soundness of as many as 1, 139 federal credit unions, given the impact to 00:06:40.336 --> 00:06:42.056 one or more areas of performance. 00:06:42.131 --> 00:06:47.071 well, and liquidity capital earnings and growth, which are the four risk categories 00:06:47.081 --> 00:06:48.721 outlined in the federal credit union act. 00:06:49.561 --> 00:06:52.861 The table on this slide shows how many categories were triggered for 00:06:52.861 --> 00:06:55.661 the eleven hundred and thirty nine federal credit unions meeting at 00:06:55.671 --> 00:06:57.441 least one of those risk criteria. 00:06:57.441 --> 00:07:03.751 And as of December thirty first 37 billion or about 87 percent of loan 00:07:03.761 --> 00:07:08.681 balances with interest rates greater than 15 percent were held by these 1139 00:07:08.681 --> 00:07:13.731 federal credit unions collectively with an average interest rate of about 17. 00:07:13.731 --> 00:07:16.561 35 percent for those loans with rates above 15%. 00:07:17.831 --> 00:07:22.701 If the interest rate ceiling were to revert to 15%, a 235 basis point 00:07:22.711 --> 00:07:26.761 reduction in average loan interest rates could lead to as much as 873 00:07:29.181 --> 00:07:33.091 of lost future annual interest income for those federal credit unions. 00:07:33.891 --> 00:07:38.521 The adverse impact would be particularly pronounced for 273 federal credit 00:07:38.521 --> 00:07:42.351 unions that are already struggling with negative earnings, 37 federal 00:07:42.351 --> 00:07:46.761 credit unions with low net worth ratios and 49 credit unions with greater 00:07:46.761 --> 00:07:50.731 than 10 percent of their assets and loans with rates greater than 15%. 00:07:52.281 --> 00:07:52.861 Next slide, please. 00:07:55.671 --> 00:07:59.691 Since 1987, when the NCA Board first set the loan interest rate ceiling at 00:08:00.531 --> 00:08:03.781 18%, the spreads between the Federal Credit Union loan interest rate ceiling 00:08:03.911 --> 00:08:06.731 and the prime rate have ranged from 6. 00:08:06.731 --> 00:08:07.851 5 percent, 6. 00:08:07.931 --> 00:08:09.801 50 percentage points and 14. 00:08:10.131 --> 00:08:11.471 75 percentage points. 00:08:12.196 --> 00:08:16.346 And currently, as noted priorly, uh, uh, in, in prior slides, the 9. 00:08:16.436 --> 00:08:20.436 5 percentage point spread between the current loan rate ceiling of 18 00:08:20.436 --> 00:08:23.726 percent and the current prime rate is still sufficient to support loan 00:08:23.726 --> 00:08:25.706 pricing needs in Federal Credit Unions. 00:08:26.396 --> 00:08:30.636 Overall, Federal Credit Unions maintain sound performance during 2023 with the 00:08:30.636 --> 00:08:32.786 current 18 percent loan rate ceiling. 00:08:34.086 --> 00:08:39.046 NCUA staff assess that in the current environment, an 18 percent loan interest 00:08:39.046 --> 00:08:42.716 rate ceiling provides federal credit unions with sufficient risk pricing 00:08:42.716 --> 00:08:47.466 ability to manage liquidity, capital, earnings, and growth, and protects 00:08:47.466 --> 00:08:51.356 member access to safe and affordable credit, and does not require federal 00:08:51.356 --> 00:08:55.476 credit unions to incur any additional operational burden or costs associated 00:08:55.476 --> 00:08:57.076 with a change to the loan rate ceiling. 00:08:57.806 --> 00:08:58.456 Next slide, please. 00:09:00.686 --> 00:09:04.256 In addition to the statutory considerations, NCA staff also 00:09:04.256 --> 00:09:07.976 assessed the interest rate ceilings impact on a program integral to a 00:09:07.976 --> 00:09:11.556 lot of members, which is the Payday Alternative Loans Program, or PALS. 00:09:12.316 --> 00:09:15.676 The PALS program provides federal credit unions with diversification in their 00:09:15.676 --> 00:09:19.716 loan portfolios, but more importantly, it provides a better alternative to 00:09:19.716 --> 00:09:23.006 payday lenders for tens of thousands of members who need it the most. 00:09:24.096 --> 00:09:28.126 The current interest rate ceiling on the PALS program is 28 percent, which is 00:09:28.126 --> 00:09:30.216 determined by adding 1, 000 basis points. 00:09:30.706 --> 00:09:34.766 to the interest rate ceiling when the NCOA sets a higher than 00:09:34.766 --> 00:09:36.216 15 percent loan rate ceiling. 00:09:37.111 --> 00:09:40.181 However, if the Federal Credit Union loan rate ceiling reverts 00:09:40.191 --> 00:09:44.811 back to the 15 percent statutory limit, the maximum allowable PALS 00:09:44.921 --> 00:09:47.441 rate would also fall back to 15%. 00:09:49.091 --> 00:09:49.561 Next slide. 00:09:49.711 --> 00:09:50.631 Oh, no, excuse me. 00:09:50.661 --> 00:09:51.111 Same slide. 00:09:52.121 --> 00:09:55.461 Um, allowing the loan rate ceiling to revert to 15 percent would 00:09:55.461 --> 00:09:59.251 constrain a Federal Credit Union's ability to apply risk based pricing 00:09:59.301 --> 00:10:02.171 for borrowers who currently take advantage of the PALS program. 00:10:02.656 --> 00:10:05.696 And more importantly, reversion of the interest rate ceiling could lead 00:10:05.696 --> 00:10:09.116 to the elimination of PALS lending if Federal Credit Unions can't price 00:10:09.156 --> 00:10:11.166 these loans appropriately for the risk. 00:10:11.836 --> 00:10:14.836 And this could result in tens of thousands of Federal Credit Union members 00:10:14.856 --> 00:10:18.376 being driven to other, more expensive lenders to meet their borrowing needs. 00:10:19.266 --> 00:10:20.026 Next slide, please. 00:10:21.346 --> 00:10:25.596 In summary, staff recommends the NCOA Board establish a temporary maximum 00:10:25.596 --> 00:10:29.466 loan interest rate ceiling of 18 percent for the 18 month period effective 00:10:29.466 --> 00:10:33.646 September 11, 2024 to March 10, 2026. 00:10:34.016 --> 00:10:34.786 Next slide, please. 00:10:35.646 --> 00:10:37.036 This concludes our presentation. 00:10:37.126 --> 00:10:38.846 Thank you for your time this morning and we'd be happy to 00:10:38.846 --> 00:10:39.876 answer any questions you have. 00:10:40.696 --> 00:10:43.266 Chairman Todd Harper: Thank you, Nagi, for the work of you and your team on 00:10:43.266 --> 00:10:47.296 the reconsideration of the Federal Credit Union loan interest rate ceiling. 00:10:47.646 --> 00:10:51.876 I appreciate all your efforts in bringing the interest rate ceiling for Federal 00:10:51.876 --> 00:10:57.276 Credit Unions before the NCUA Board today, and thank you, Amanda, for being here to 00:10:57.276 --> 00:10:59.316 answer any questions that we might have. 00:10:59.926 --> 00:11:05.146 As noted in the presentation, the NCUA Board in January 2023 last authorized 00:11:05.146 --> 00:11:09.566 an 18 percent ceiling or the loan interest rate for federal credit unions 00:11:09.596 --> 00:11:12.676 effective through September 10, 2024. 00:11:13.056 --> 00:11:17.726 If the NCUA Board does not act today, the maximum interest rate for federal 00:11:17.726 --> 00:11:20.626 credit unions The rate of interest that they may charge will revert 00:11:20.626 --> 00:11:23.726 to 15 percent on September 11th. 00:11:23.886 --> 00:11:28.606 Specifically, the Federal Credit Union Act requires that the rate of interest 00:11:28.836 --> 00:11:32.766 a Federal Credit Union can charge may not exceed 15 percent annually. 00:11:33.166 --> 00:11:37.736 But in setting the statutory ceiling, Congress also incorporated a regular 00:11:37.736 --> 00:11:42.496 review process or an escape hatch, if you will, for the NCWA Board to 00:11:42.496 --> 00:11:46.286 reconsider the ceiling and adjust it under certain conditions after 00:11:46.286 --> 00:11:47.866 following certain procedures. 00:11:48.466 --> 00:11:52.046 Specifically, the board may for a period not to exceed 18 months 00:11:52.046 --> 00:11:56.996 determine to exceed the statutory 15 percent ceiling after completing the 00:11:56.996 --> 00:12:00.826 required consultations, reviewing the interest rate environment and market 00:12:00.826 --> 00:12:04.676 conditions, and completing certain assessments required by the law. 00:12:05.306 --> 00:12:10.446 Here, the NCOA team conducted a really thorough analysis of recent market 00:12:10.446 --> 00:12:14.586 and financial conditions and concluded that money market rates have risen 00:12:14.626 --> 00:12:16.396 over the preceding six month period. 00:12:16.906 --> 00:12:20.396 That fact should come as no surprise to anyone who has monitored our 00:12:20.396 --> 00:12:23.406 financial markets and the recent decisions of the Federal Reserve 00:12:23.426 --> 00:12:25.466 Board's Federal Open Market Committee. 00:12:26.216 --> 00:12:29.796 The NCOA team also completed its required consultation with Congress, 00:12:30.116 --> 00:12:31.696 the other federal banking agencies. 00:12:31.901 --> 00:12:33.201 and the Treasury Department. 00:12:33.541 --> 00:12:36.471 I also believe we received no comments back on that. 00:12:36.471 --> 00:12:37.601 Am I correct on that? 00:12:37.761 --> 00:12:38.231 Staff 3: That's correct. 00:12:39.221 --> 00:12:41.641 Chairman Todd Harper: Finally, the NCUA team determined whether the prevailing 00:12:41.641 --> 00:12:44.671 interest rate levels threaten the safety and soundness of individual 00:12:44.671 --> 00:12:48.271 credit unions with respect to liquidity, capital, earnings, and growth. 00:12:48.731 --> 00:12:52.296 That analysis concluded that lowering the interest rate ceiling below 18 00:12:52.296 --> 00:12:57.521 percent would indeed be detrimental to a certain number of credit unions. 00:12:58.121 --> 00:13:02.051 I want to pause here, because am I correct in assuming that most of 00:13:02.051 --> 00:13:04.991 those credit unions it's because of their credit card portfolios? 00:13:05.231 --> 00:13:08.691 Home loans certainly aren't at 18 percent, or anywhere near it. 00:13:09.061 --> 00:13:12.581 Uh, home equity lines of credit aren't at that rate. 00:13:12.781 --> 00:13:16.071 Uh, is this primarily a credit card issue? 00:13:17.111 --> 00:13:19.711 Staff 3: Unsecured loans, primarily credit cards and other 00:13:19.711 --> 00:13:20.941 personal unsecured loans, correct? 00:13:21.061 --> 00:13:21.761 Chairman Todd Harper: That's helpful. 00:13:22.331 --> 00:13:26.271 To that end, the NCUA experts have recommended that the NCUA Board vote 00:13:26.321 --> 00:13:31.761 to temporarily establish a maximum loan interest rate ceiling of 18 percent for 00:13:31.761 --> 00:13:37.401 the 18 month period effective September 11, 2024 through March 10, 2026. 00:13:37.881 --> 00:13:40.581 I agree with this recommendation and will vote for this item. 00:13:41.151 --> 00:13:45.041 Before closing, we must always remember who ultimately feels the effects of 00:13:45.041 --> 00:13:47.001 these interest rate ceiling decisions. 00:13:47.431 --> 00:13:50.851 The Credit Union System's statutory mission is to support the credit 00:13:50.851 --> 00:13:55.271 and savings needs of all Americans, especially those of modest means, and 00:13:55.271 --> 00:13:58.881 it's those American households that are under increasing financial stress 00:13:58.881 --> 00:14:03.791 from financial pressures the NCUA would place under additional stress if we 00:14:03.791 --> 00:14:05.541 were to raise the interest rate ceiling. 00:14:07.136 --> 00:14:10.466 And the NCUA should not cause unnecessary safety and soundness 00:14:10.506 --> 00:14:14.156 risks for federal credit unions by inappropriately lowering the rate. 00:14:14.516 --> 00:14:17.856 This balanced decision is the right one to protect the financial prospects 00:14:17.856 --> 00:14:20.816 of those who use the credit union system and ensure that the credit 00:14:20.826 --> 00:14:22.696 union system remains safe and sound. 00:14:23.106 --> 00:14:24.526 That concludes my remarks. 00:14:24.536 --> 00:14:26.986 I now hand it over to the Vice Chairman. 00:14:28.306 --> 00:14:28.836 Vice Chairman Kyle Hauptman: Thank you, sir. 00:14:30.856 --> 00:14:33.676 Thank you guys for the, uh, detailed analysis. 00:14:33.936 --> 00:14:36.626 So, just to review the history, 1980, that's the most important 00:14:36.636 --> 00:14:38.226 year in this entire discussion. 00:14:39.086 --> 00:14:42.036 In 1980, they passed the Monetary Control Act, which raised it from 00:14:42.036 --> 00:14:45.116 15 to 12, as the Chairman said, the maximum rate we could charge. 00:14:45.116 --> 00:14:46.576 They've been 12 percent all through the 70s. 00:14:47.856 --> 00:14:50.356 And Congress also gave some discretion for certain reasons. 00:14:51.376 --> 00:14:53.846 The only number in the Federal Credit Union Act, the only 00:14:53.846 --> 00:14:55.526 interest rate, is 15, right? 00:14:56.236 --> 00:14:58.866 One, five, kinsei, jyugo in Japanese. 00:14:58.896 --> 00:14:59.336 That's it. 00:14:59.756 --> 00:15:00.616 It's the only number in there. 00:15:01.796 --> 00:15:03.496 If you recall, why did this happen? 00:15:03.596 --> 00:15:05.696 Okay, and that's what drives our decision today. 00:15:06.136 --> 00:15:10.326 Because the Volcker Fed was raising rates to unprecedented levels. 00:15:11.166 --> 00:15:16.666 1980, the prime rate, 21, uh, at the time it was 20. 00:15:16.666 --> 00:15:16.686 5. 00:15:16.686 --> 00:15:18.736 Later that year it hit 21 point, uh, 21. 00:15:18.996 --> 00:15:19.346 5. 00:15:19.986 --> 00:15:22.836 Um, the Fed rate was a range of 19 to 20. 00:15:22.846 --> 00:15:24.246 Back then they had a one point range. 00:15:26.416 --> 00:15:29.006 And so they understood that it was impossible to extend any credit. 00:15:30.446 --> 00:15:32.306 The Fed rates basically were banks borrow overnight. 00:15:32.306 --> 00:15:34.356 You're never going to borrow from a bank cheaper than the bank can borrow. 00:15:34.566 --> 00:15:35.916 That's why it's such short term rates. 00:15:36.836 --> 00:15:40.286 So immediately after the Monetary Control Act was passed in 1980, the 00:15:40.286 --> 00:15:44.236 board raised it to a maximum, to 21%, where it remained for a few years. 00:15:44.691 --> 00:15:49.791 Okay, and this was done hand in hand with Congress and, uh, both anybody that 00:15:49.791 --> 00:15:53.041 had a price cap back then was talking to Congress and that resulted in this bill. 00:15:53.051 --> 00:15:56.381 So this is Congress's intent, the best we can tell. 00:15:57.861 --> 00:16:01.801 We know at a time where the prime rate at the time of passing it was 20. 00:16:01.801 --> 00:16:08.511 5, that the 21 percent that NCUA put it at was adequate and did not back, 00:16:08.581 --> 00:16:10.901 um, and was supported by Congress. 00:16:11.701 --> 00:16:16.431 So 21 percent when the prime rate was 20. 00:16:16.431 --> 00:16:21.856 5 and the Fed, uh, was a range of 19 That's the context here. 00:16:22.956 --> 00:16:26.876 So as the Chairman said, uh, to raise the rate any time above 15, consultation 00:16:26.876 --> 00:16:29.636 with Congress, money market rates have risen over the last six months, prevailing 00:16:29.636 --> 00:16:32.706 interest rates, uh, and that prevailing interest rates threaten the safety and 00:16:32.706 --> 00:16:34.316 soundness of individual credit units. 00:16:35.156 --> 00:16:38.366 Uh, if the Board does not act today, the maximum rate reverts 00:16:38.376 --> 00:16:40.266 back to the maximum of 15. 00:16:42.236 --> 00:16:44.976 The last time we addressed the interest rate, the Board requested an analysis 00:16:44.976 --> 00:16:47.916 from the General Counsel on whether a variable rate would be legal. 00:16:48.821 --> 00:16:51.261 Although it was determined to be legal, and I personally think 00:16:51.261 --> 00:16:52.671 economically it's the smartest one. 00:16:52.961 --> 00:16:55.461 Let it move with markets, not with what the board decides to do. 00:16:57.461 --> 00:17:02.211 But for one thing, any variable rate that we could possibly enact would 00:17:02.211 --> 00:17:05.331 mean a maximum rate well below 15. 00:17:07.396 --> 00:17:11.516 I assure you the people arguing with us would not, uh, be quiet if 00:17:11.516 --> 00:17:15.906 we had a maximum rate on anything unsecured at 12%, let's say, okay? 00:17:18.716 --> 00:17:22.076 I don't believe at NCUA we could legally use a variable rate that would say the 00:17:22.076 --> 00:17:26.016 prime rate or even the Fed's overnight rate plus another 15, 16%, right? 00:17:26.016 --> 00:17:30.566 16 percent plus the Fed's overnight rate today already puts you over the 21%. 00:17:31.801 --> 00:17:34.421 That they did in 1980, when the prime rate was 20 and a half. 00:17:34.581 --> 00:17:35.671 It doesn't even make any sense. 00:17:36.871 --> 00:17:40.281 So, to everyone who objects to our current rate cap, what we're voting 00:17:40.281 --> 00:17:44.721 for today, and I'm going to vote for it, this is a matter for Congress. 00:17:44.941 --> 00:17:47.701 Once someone reads the actual law that we at the NCUA will follow, 00:17:47.721 --> 00:17:48.941 they arrive at the same conclusion. 00:17:49.241 --> 00:17:50.981 It's a matter for Congress, not NCUA. 00:17:52.221 --> 00:17:55.081 We're only here to do what Congress tells us to do. 00:17:55.461 --> 00:17:58.931 We're not here to decide what interest rate cap is ideal. 00:17:59.966 --> 00:18:02.956 I say this because many of the people who've argued for higher rates are not 00:18:03.066 --> 00:18:06.306 aware of what Intuit is told to do. 00:18:06.376 --> 00:18:07.346 There's only two kinds of people. 00:18:07.596 --> 00:18:10.636 People who argue for things like prime plus 15 and people who've read the act. 00:18:11.886 --> 00:18:14.166 Almost every time I ask somebody, all right, well, if you were in 00:18:14.166 --> 00:18:15.096 our shoes, what would you do? 00:18:15.296 --> 00:18:16.156 What would be your policy? 00:18:16.226 --> 00:18:17.026 It's usually variable. 00:18:17.056 --> 00:18:18.226 Again, that's a smarter way to do it. 00:18:19.176 --> 00:18:20.566 Um, I said, what would you implement? 00:18:20.646 --> 00:18:22.286 The answer I get is always one that's illegal. 00:18:23.536 --> 00:18:26.616 I'll mention that I'm aware of the negative effects of 00:18:26.906 --> 00:18:27.836 government price shedding. 00:18:27.896 --> 00:18:29.096 I don't need to be told about that. 00:18:29.096 --> 00:18:29.676 I agree with it. 00:18:30.076 --> 00:18:32.506 I'm aware that it's usually the least of these that get harmed when government 00:18:32.506 --> 00:18:35.416 interferes in market prices, that people are going to go to other lending 00:18:35.416 --> 00:18:36.976 sources or not have a credit card. 00:18:37.146 --> 00:18:38.946 It's hard to operate in America without a credit card. 00:18:39.376 --> 00:18:43.136 And I know you can't even issue one to some people, uh, if, given their 00:18:43.136 --> 00:18:46.006 risk profile, if the, um, Cap is 18. 00:18:46.546 --> 00:18:49.186 Uh, currently we, we do not have evidence, if you go back to 00:18:49.186 --> 00:18:51.126 1980, that resembles that period. 00:18:51.236 --> 00:18:51.626 Okay? 00:18:52.206 --> 00:18:55.426 Um, but of course there are signals that lowering it would threaten the safety 00:18:55.426 --> 00:18:57.076 and soundness of individual credit units. 00:18:57.706 --> 00:19:01.176 The 18 percent ceiling provides low income and CDFI credit units some 00:19:01.176 --> 00:19:04.766 headroom above the statutory rate of 15, and of course that means 10 00:19:04.766 --> 00:19:06.206 percent above that is a PALS loan. 00:19:08.676 --> 00:19:13.491 For some low income, uh, community and CDFI credit units, It could 00:19:13.521 --> 00:19:15.431 be most of their membership that would get walloped here. 00:19:15.901 --> 00:19:17.531 Uh, with that said, this is a question for you. 00:19:17.711 --> 00:19:22.391 Uh, if the rate were allowed to revert to 15%, can you discuss how many credit 00:19:22.391 --> 00:19:26.241 unions would be impacted from a safety and soundness perspective, and what 00:19:26.251 --> 00:19:28.571 portion would be low income MDI or CDFI? 00:19:29.231 --> 00:19:33.631 Staff 3: Certainly, so about 1, 139 federal credit unions would be impacted 00:19:33.631 --> 00:19:37.061 from a safety and soundness perspective to any one or combination of the risk 00:19:37.071 --> 00:19:39.231 categories defined in the statute. 00:19:39.601 --> 00:19:44.081 And of those, about two thirds or about 759 federal credit unions either have 00:19:44.081 --> 00:19:47.956 a low income or MDI designation or are certified as CDFI institutions. 00:19:47.956 --> 00:19:49.741 1, 100 something, that's 00:19:49.991 --> 00:19:51.901 Vice Chairman Kyle Hauptman: ballpark a quarter of the credit unions in America. 00:19:52.251 --> 00:19:55.871 Okay, and then the majority of those are low income MDI or CFI, right? 00:19:56.431 --> 00:19:56.861 Okay. 00:19:57.451 --> 00:19:59.401 Uh, just an interesting footnote. 00:19:59.441 --> 00:20:05.641 I think partly to some entrepreneurs out there, some technology has helped that 00:20:05.671 --> 00:20:10.751 the PALS loans, which were never feasible for lender or buyer in most cases, 00:20:10.751 --> 00:20:16.381 they've made Some entrepreneurs, some private businesses have created technology 00:20:16.381 --> 00:20:17.521 to make it a little more feasible. 00:20:17.521 --> 00:20:22.191 So we've seen Increased in outstanding PALS, both the number, let's see, 18 00:20:22.191 --> 00:20:23.881 month period ending last December. 00:20:24.841 --> 00:20:27.271 Balance of PALS went from 84 million to 120 million. 00:20:27.271 --> 00:20:28.311 That's over 40 percent. 00:20:28.341 --> 00:20:32.381 The number of them went from 111, 000. 00:20:32.381 --> 00:20:32.731 That's 35 percent. 00:20:33.186 --> 00:20:37.146 Um, so that is an interesting, um, uh, note in all of this. 00:20:37.556 --> 00:20:39.416 Um, that concludes my remarks. 00:20:39.416 --> 00:20:40.256 I have no further questions. 00:20:41.426 --> 00:20:41.876 Thank you. 00:20:41.876 --> 00:20:44.076 Board Member Otsuka. 00:20:44.536 --> 00:20:45.446 Board Member Tanya Otsuka: Thank you, Chair Harper. 00:20:45.496 --> 00:20:49.376 Um, and thank you, Nagi and Amanda, and thank you to all the 00:20:49.376 --> 00:20:50.796 staff who've been working on this. 00:20:51.446 --> 00:20:57.466 Um, from 1987 until now, you know, there have been economic downturns, including 00:20:57.816 --> 00:20:59.816 recession, high inflation, the pandemic. 00:21:00.666 --> 00:21:03.396 Yet the credit union system has been able to grow with an interest 00:21:03.396 --> 00:21:04.836 rate ceiling of 18 percent. 00:21:05.456 --> 00:21:08.086 Um, you know, my colleagues have kind of gone through, uh, 00:21:08.106 --> 00:21:09.206 some of the history on that. 00:21:09.876 --> 00:21:13.306 At the end of 1987, our system of cooperative credit totaled 00:21:13.316 --> 00:21:14.996 160 billion dollars in assets. 00:21:15.386 --> 00:21:18.666 Today, as of March 2024, our credit union system has 2. 00:21:18.696 --> 00:21:20.046 3 trillion dollars in assets. 00:21:21.606 --> 00:21:25.206 This is evidence that credit unions can thrive while providing their members 00:21:25.206 --> 00:21:26.241 access to credit at the same time. 00:21:26.541 --> 00:21:31.671 These reasonable rates Congress established specific statutory 00:21:31.671 --> 00:21:35.191 requirements that the board must consider before setting the rate ceiling above 00:21:35.201 --> 00:21:39.771 15 percent Staffs analysis and due diligence consistent with the statute 00:21:39.771 --> 00:21:44.251 supports keeping the interest rate ceiling at 18 percent Only in 1980 when 00:21:44.251 --> 00:21:47.771 inflation peaked at fourteen point six percent far higher than it is today 00:21:48.161 --> 00:21:51.221 Did the NC way board raise the interest rate ceiling to twenty one percent? 00:21:52.576 --> 00:21:55.396 You know, today, at the same time, loan portfolio data from our call 00:21:55.396 --> 00:21:58.156 reports indicates that consumers are already feeling squeezed. 00:21:58.166 --> 00:22:04.336 So, talking about the borrowers here, between quarter 1 2023 and quarter 1 00:22:04.336 --> 00:22:07.026 2024, credit card balances grew by 6. 00:22:07.026 --> 00:22:09.236 6 billion or 9%. 00:22:09.251 --> 00:22:10.311 to 80, uh, 80. 00:22:10.311 --> 00:22:11.331 8 billion. 00:22:12.361 --> 00:22:14.631 This is more concerning when coupled with the fact that credit 00:22:14.631 --> 00:22:18.491 card delinquency rate rose by 54 basis points during the last year. 00:22:19.121 --> 00:22:21.831 Furthermore, the delinquency rate for the other major loan products 00:22:21.831 --> 00:22:24.301 offered by credit unions, such as auto loans, residential real 00:22:24.301 --> 00:22:28.181 estate, are also increasing 21 and 19 basis points, respectively. 00:22:28.311 --> 00:22:35.836 So um, Nagi and Amanda, um, do you, Do you anticipate that raising the 00:22:35.836 --> 00:22:39.796 interest rate ceiling to 21 percent could cause the delinquency rate across 00:22:39.796 --> 00:22:41.516 loan products to further increase? 00:22:41.666 --> 00:22:45.386 And I know in other board meetings and briefings, we've, we've talked 00:22:45.386 --> 00:22:49.876 about, um, you know, how you guys are watching delinquency rates. 00:22:51.336 --> 00:22:53.686 Staff 3: So I can address that question, uh, Board Member Roscoe. 00:22:53.746 --> 00:22:55.726 So, and I'll address it from a borrowing perspective. 00:22:57.151 --> 00:23:00.511 So, with a higher interest rate ceiling, loans could become more 00:23:00.511 --> 00:23:04.921 expensive for borrowers and leading to potentially increased monthly payments. 00:23:05.311 --> 00:23:08.171 And those borrowers, you mentioned, are already financially stretched, may 00:23:08.181 --> 00:23:12.521 struggle to keep up with higher payments, which could potentially result in higher 00:23:12.531 --> 00:23:16.121 delinquency rates, particularly in a challenging economic environment where 00:23:16.121 --> 00:23:20.981 rising costs and inflation, especially if the unemployment rate also increases. 00:23:22.181 --> 00:23:25.241 There are other influencing factors also to keep in mind that could potentially 00:23:25.241 --> 00:23:28.121 also have an impact on the delinquency rates, and that's the credit union's 00:23:28.211 --> 00:23:32.241 underwriting practices and their assessment of a member's ability to repay, 00:23:32.631 --> 00:23:37.071 the loan terms and conditions and how those correlate to a borrower's capacity 00:23:37.091 --> 00:23:39.201 and, and the general economic conditions. 00:23:39.631 --> 00:23:43.711 In generally in a strong economic environment, borrowers may, may be 00:23:43.711 --> 00:23:45.301 able to manage higher payments better. 00:23:45.671 --> 00:23:49.531 But in weaker economies, even a modest increase in loan payments 00:23:49.531 --> 00:23:52.471 could potentially exacerbate financial conditions for members. 00:23:52.676 --> 00:23:53.093 Okay. 00:23:53.093 --> 00:23:54.686 Board Member Tanya Otsuka: That concludes my response. 00:23:54.936 --> 00:23:55.466 Thank you. 00:23:56.226 --> 00:23:59.996 Um, and how would in, right, how would raising the interest rate ceiling to 00:23:59.996 --> 00:24:03.966 21 percent affect credit unions members ability to gain access to affordable 00:24:03.966 --> 00:24:06.926 credit, and I think your, actually your response kind of touched a little bit 00:24:06.926 --> 00:24:11.176 on this, um, and affect their mission to provide credit to those in modest needs? 00:24:11.856 --> 00:24:12.226 Staff 3: Certainly. 00:24:12.226 --> 00:24:13.986 So, so I'll address it from two points. 00:24:14.206 --> 00:24:17.996 Raising the ceiling could theoretically allow credit unions to enhance their 00:24:17.996 --> 00:24:23.101 ability to better, um, is, is a chairman's office in Washington DC. 00:24:23.101 --> 00:24:29.337 And he provides the credit for the transcript, uh, in a way called 00:24:29.337 --> 00:24:30.991 the Transcriptional Advocacy Bill. 00:24:30.991 --> 00:24:36.366 And the Transcriptional Advocacy Bill is a bill that provides the federal government 00:24:36.366 --> 00:24:41.741 and the federal agency to provide specific funding in advance for the concept 00:24:41.741 --> 00:24:46.291 of a transcriptional And particularly in an inflationary environment where 00:24:46.291 --> 00:24:49.781 cost of living is already rising could make credit less affordable 00:24:49.821 --> 00:24:53.831 and potentially stretch the financial resources of lower income members 00:24:53.851 --> 00:24:55.151 or those who are already struggling. 00:24:56.156 --> 00:24:56.396 Okay. 00:24:56.396 --> 00:24:57.036 Closing my response. 00:24:57.606 --> 00:24:58.086 Board Member Tanya Otsuka: Thank you. 00:24:58.096 --> 00:24:58.686 Thank you. 00:24:58.736 --> 00:25:02.836 Um, yeah, I think it's important to remember that, you know, credit unions 00:25:02.836 --> 00:25:06.446 are not for profit organizations, uh, whose main mission is to provide 00:25:06.446 --> 00:25:09.366 credit and financial services to communities that need it the most. 00:25:09.866 --> 00:25:12.866 You know, and instead of aiming to achieve a particular profit margin or 00:25:12.886 --> 00:25:18.381 satisfying shareholder interest, this mission is really core What credit 00:25:18.381 --> 00:25:21.581 unions do, and that should be the most important consideration for credit unions. 00:25:22.321 --> 00:25:25.931 Um, but I think at the same time, you know, I think we understand, right, 00:25:25.971 --> 00:25:32.261 as we've, as we've discussed, um, the economic conditions, at the one 00:25:32.261 --> 00:25:35.911 time, the NCOA board has raised the interest rate ceiling far, far higher. 00:25:36.461 --> 00:25:37.531 Far higher. 00:25:37.531 --> 00:25:40.401 Inflation is far higher than it is even today. 00:25:40.441 --> 00:25:45.631 And there are much more positive signs today than there were back then. 00:25:46.061 --> 00:25:50.031 We're talking about a very different economic environment when the NCUA 00:25:50.031 --> 00:25:51.671 board raised the ceiling to 21%. 00:25:53.006 --> 00:25:55.956 Um, so for these reasons, I support maintaining the interest 00:25:55.956 --> 00:25:57.556 rate loan ceiling at 18%. 00:25:58.186 --> 00:26:01.456 This rate provides more flexibility above the threshold that Congress 00:26:01.456 --> 00:26:06.136 established, and it also allows credit unions to grow while still being able 00:26:06.136 --> 00:26:10.566 to provide credit at a competitive rate compared to other financial institutions. 00:26:11.126 --> 00:26:13.736 Um, so thank you, Chair Harper and Vice Chair Hopman. 00:26:13.746 --> 00:26:16.526 Um, thank you to the staff, and I'll turn it back over to you. 00:26:18.446 --> 00:26:19.396 Chairman Todd Harper: Thank you so much. 00:26:19.416 --> 00:26:21.016 Vice Chairman Haltman, is there a motion? 00:26:23.226 --> 00:26:23.816 Vice Chairman Kyle Hauptman: Yes, sir. 00:26:24.396 --> 00:26:27.406 I move that the board approve maintaining the current 18 percent maximum loan 00:26:27.406 --> 00:26:31.306 interest rate for federal credit units effective September 11, 2024 00:26:31.576 --> 00:26:35.336 through March 10, 2026 as detailed in the board action memorandum. 00:26:35.436 --> 00:26:36.336 Is there a second? 00:26:36.556 --> 00:26:36.906 Board Member Tanya Otsuka: Second. 00:26:37.076 --> 00:26:38.436 Chairman Todd Harper: There is a sufficient second. 00:26:38.466 --> 00:26:39.886 All those in favor say aye. 00:26:40.046 --> 00:26:40.376 Aye. 00:26:40.416 --> 00:26:40.766 Board Member Tanya Otsuka: Aye. 00:26:40.916 --> 00:26:41.316 Chairman Todd Harper: Aye. 00:26:41.446 --> 00:26:42.806 All those opposed say nay. 00:26:43.246 --> 00:26:47.756 The ayes have it and let the record show that the motion passes three to zero. 00:26:48.176 --> 00:26:49.516 Samantha: This concludes this item. 00:26:50.266 --> 00:26:54.426 If your Credit union could use assistance with your exam, reach out to Mark Treichel 00:26:54.426 --> 00:26:57.146 on LinkedIn, or at mark Treichel dot com. 00:26:57.726 --> 00:27:00.396 This is Samantha Shares and we Thank you for listening.