ALEXANDRIA, Va.—In response to NCUA's decision to extend the 18% loan interest rate ceiling until Sept. 10, 2021, NAFCU is urging the agency explore the adoption of a variable interest rate, and encouraged the board to publish an advanced notice of proposed rulemaking (ANPR).
An ANPR for the rate ceiling is listed on the NCUA’s Fall Rulemaking agenda.
As CUToday.info reported, the board agreed to extend the loan interest rate ceiling during its January board meeting, the current rate was set to expire March 11, 2020, and would have reverted to 15% without board action.
“A variable interest rate allows credit unions to adequately utilize risk-based pricing, helping to mitigate interest rate risk and credit risk,” wrote NAFCU President Dan Berger in a letter to the agency. “A variable interest rate with a fixed spread over Prime would still be below the interest rates often charged by banks.”
Spread Over Prime
In the letter, Berger specifically suggests the adoption of a 15% spread over Prime.
"Given the confines of the current interest rate ceiling, growth opportunities are stifled as credit unions are unable to take reasonable amounts of risk and lend to those members not suitable for an 18% rate," he added.
Berger also noted the benefits of a variable interest rate, highlighting that the implementation costs and administrative burdens are low, and it would "expand lending access to underserved borrowers, and provide a timely and transparent mechanism for adjusting the interest rate ceiling."
Additionally, Berger said the setting of a variable interest rate would position credit unions as “more competitive in the financial services industry.”