ALEXANDRIA, Va.–The NCUA board has extended the 18% temporary federal CU loan interest rate ceiling until early 2023, with one board member saying he is interested in getting feedback on moving to a variable rate.
The rule is called “temporary” because it must be renewed for 18-month periods.
John Nilles, senior capital markets specialist with NCUA, said many CUs are making Payday Alternative Loans (PALs) under the interest rate ceiling, providing needed financial assistance to many members.
Prior to the vote, NCUA Chairman Todd Harper said extending the 18% ceiling, which has been in place since 1987, agency staff conducted significant research.
“Before reaching this decision, staff conducted an analysis of recent market and financial conditions,” said Harper. “That analysis concludes that money market rates have risen over the preceding six- month period. It also finds lowering the interest rate ceiling below the current temporary 18% maximum would threaten the safety and soundness of individual credit unions due to the anticipated adverse effect upon liquidity, capital, earnings. and growth.”
Moving forward, Harper encouraged all CUs to offer their members lower rates whenever possible and to develop affordable loan products that include a savings feature.
‘Innovative & Affordable’
“Providing members with an easy way to save for a rainy day will help them weather small emergencies that might otherwise have caused them to go to a payday lender,” said Harper. “In fact, in my conversations with credit unions prior to and during the COVID-19 pandemic, I learned of several credit unions making short-term loans that include a savings feature or that carry an interest rate as low as 5%. During the initial days of the pandemic, some credit unions even offered these low-dollar loans with no interest for 90 days. These innovative and affordable products underscore the mission of the credit union system to provide financial services to everyone, including those of modest means.”
Hood: Counterintuitive, but ‘Necessary’
NCUA Board Member Rodney Hood said that while establishing a temporary higher maximum loan rate for federal credit unions can seem counterintuitive, it's quite “necessary.”
“A significant number of our credit unions depend on this temporary ceiling because it gives them head room above the statutory rate to effectively expand the qualifying universe of low-income members to whom they can lend,” said Hood. “I am glad that credit unions are effectively using sensible risk-based pricing as a means to achieve a more efficient allocation of their capital. This is truly important because it also allows them to support more lending risk, responsibly, while better optimizing the extension of credit across their memberships. In other words, this allows many of our federal credit unions to extend more credit than they would otherwise do if no temporary increase in the ceiling were granted.”
Hood reminded the 18% temporary maximum loan rate has been sustained continuously by the NCUA board actions since 1987 and is being extended even as lawmakers in various parts of the country are proposing laws to establish maximum loan rates on consumers at levels as high as 36%.
“So, when you say that the 18% rate is allowing sufficient room for responsible pricing, we are still authorizing a ceiling far below what many contemporary policymakers view as a prudential rate cap,” he said.
ANPR Proposed
Hood called on his fellow board members to consider an advance notice of proposed rulemaking to seek stakeholder input on the concept of using a variable rate when setting the temporary rate ceilings.