WASHINGTON–The Treasury Department has told NCUA it does not see any reason to raise the current 18% interest-rate ceiling for loans made by federal credit unions, according to a letter to the agency reviewed by CUToday.info.
The letter comes as the NCUA board is to meet this week with the interest rate cap on the agenda.
The Federal Credit Union Act requires NCUA to consult with Treasury before considering changes to the interest-rate ceiling. In addition, in its letter Treasury noted any change to the NCUA’s interest-rate ceiling would also affect the interest-rate cap for lending products in the Treasury-managed State Small Business Credit Initiative (SSBCI), which is tied to the NCUA rate.
‘Affordable & Consistent’
“As you know, the FCU Act created the interest-rate ceiling based on the expectation FCUs use their non-profit structure to offer affordable credit, which has continued to be the case,” Treasury said to NCUA in its letter. “While the NCUA must ensure that the ceiling is set at a level that enables FCUs to operate safely and soundly in providing high-quality credit products, it is also critical to ensure that the credit offered is affordable, consistent with FCUs’ non-profit structure.”
Treasury told the agency that while rates have been steadily increasing, they remain lower than in previous periods over the last 35 years, during which the 18% interest-rate ceiling has been in place.
No ‘Justification’
“Thus, current money market interest rates do not appear to provide sufficient justification for changing the interest-rate cap,” Treasury wrote. “FCUs have a demonstrated ability to operate safely and soundly in higher interest-rate environments, particularly in the 1980s, 1990s, and mid-2000s. Additionally, while the market landscape has evolved over that period, FCUs continue to operate profitably and appear to be offering loans generally well below the current 18% ceiling.”
Treasury cited Q3 2022 call report data that show just 3.3% of FCUs’ total outstanding loan balances were in loans with rates above 15%.
What’s Warranted
“The recent rate environment may warrant continued monitoring by the NCUA board to ensure that the rate ceiling keeps pace with FCUs’ ability to maintain access to risk-priced credit, including for borrowers with low incomes or low credit scores,” Treasury said.
The department added, “As a point of comparison, banks, which do not share the non-profit structure and mission of FCUs, are charging an estimated average APR of just over 13% on classic credit cards. Additionally, the bank prime rate, while having risen recently, remains at a relatively low of 6.25%. The spread between the bank prime rate and NCUA loan interest-rate ceiling remains relatively large at 1,175 basis points. Again, this spread is larger than at many other points in the past 35 years that the ceiling has remained at 18%.”
No ‘Material Effect’
As a result, Treasury said it does not appear the 18% interest rate cap is materially limiting FCUs’ loan portfolios or their ability to serve their communities.
“Importantly, FCUs have additional flexibility to serve consumers deemed higher risk through the Payday Alternative Loan (PAL) program, through which small-dollar loans can be offered to consumers at rates up to 28%,” Treasury told the federal credit union regulator.
“From the available evidence, it appears that FCUs’ loan portfolios can continue to operate safely and soundly within the existing interest-rate ceiling of 18%,” Treasury said. “As a result, we believe that presently there are not compelling reasons to change the current 18% loan rate ceiling for federal credit unions.”
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