[Federal Register Volume 59, Number 148 (Wednesday, August 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18658]
[[Page Unknown]]
[Federal Register: August 3, 1994]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 701
Loan Interest Rates
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: The current 18 percent per year federal credit union loan rate
ceiling is scheduled to revert to 15 percent on September 9, 1994,
unless otherwise provided by the NCUA Board (Board). A 15 percent
ceiling would restrict certain categories of credit and adversely
affect the financial condition of a number of federal credit unions. At
the same time, prevailing market rates and economic conditions do not
justify a rate higher than the current 18 percent ceiling. Accordingly,
the Board hereby continues an 18 percent federal credit union loan rate
ceiling for the period from September 9, 1994 through March 8, 1996.
Loans and line of credit balances existing prior to May 15, 1987, may
continue to bear their contractual rate of interest, not to exceed 21
percent. The Board is prepared to reconsider the 18 percent ceiling at
any time should changes in economic conditions warrant.
EFFECTIVE DATE: September 9, 1994.
ADDRESSES: National Credit Union Administration, 1775 Duke Street,
Alexandria, Virginia, 22314-3428.
FOR FURTHER INFORMATION CONTACT:
Lindsay L. Neunlist, at the above address. Telephone number: (703) 518-
6625.
SUPPLEMENTARY INFORMATION:
Background
Public Law 96-221, enacted in 1979, raised the loan interest rate
ceiling for federal credit unions from 1 percent per month (12 percent
per year) to 15 percent per year. It also authorized the Board to set a
higher limit, after consultation with Congress, the Department of the
Treasury, and other federal financial agencies, for a period not to
exceed 18 months, if the Board should determine that: (i) money market
interest rates have risen over the preceding 6 months: and (ii)
prevailing interest rate levels threaten the safety and soundness of
individual credit unions as evidenced by adverse trends in growth,
liquidity, capital, and earnings.
On December 3, 1980, the Board determined that the foregoing
conditions had been met. Accordingly, the Board raised the loan ceiling
for 9 months to 21 percent. In the unstable environment of the first
half of the 1980s, the Board extended the 21 percent ceiling four
times. On March 11, 1987, the Board lowered the loan rate ceiling from
21 percent to 18 percent effective May 15, 1987. This action was taken
in an environment of falling market interest rates from 1980 to early
1987. The ceiling has remained at 18 percent to the present.
The Board felt, and continues to feel, that the 18 percent ceiling
will fully accommodate an inflow of liquidity into the system, preserve
flexibility in the system so that credit unions can react to any
adverse economic developments, and will ensure that any increase in the
cost of funds would not impinge on earnings of federal credit unions.
The Board would prefer not to set loan interest rate ceilings for
federal credit unions. In the final analysis, the market sets the
rates. The Board supports free lending markets and the ability of
federal credit union boards of directors to establish ban rates that
reflect current market conditions and the interests of credit union
members. Congress has, however, imposed loan rate ceilings since 1934.
In 1979, Congress set the ceiling at 15 percent but authorized the
Board to set a ceiling in excess of 15 percent if the Board can justify
it. The following analysis justifies a ceiling above 15 percent, but at
the same time does not support a ceiling above the current 18 percent.
The Board is prepared to reconsider this action at any time should
changes in economic conditions warrant.
Justification for a Ceiling No Higher Than 18 Percent
Money Market Interest Rates
Both long and short rates have increased significantly in the last
few months. Table 1 gives information on past interest rates. There is
a general consensus among economists that money market rates will
continue to rise as economic growth accelerates. Implied forward rates,
the money market's best guess about where interest rates are going, are
significantly higher over the next year. By the time this rule becomes
effective, money markets will have experienced 6 months of rising
rates. The Board is ready to revisit this issue should this expectation
not be confirmed.
Liquidity, Capital, Earnings, and Growth and Individual Credit Unions
For at least 1,477 credit unions, market conditions call for rates
on unsecured loans to be above 15 percent. For some of these credit
unions, three factors combine to require interest rate charges above 15
percent in order to maintain liquidity, capital, earnings, and growth.
Table 1.--Money Market Interest Rates
------------------------------------------------------------------------
Change
since
Yields as Jan. 1,
Maturity of July 1994 in
5, 1994 basis
points
------------------------------------------------------------------------
3-month........................................... 4.29 121
6-month........................................... 4.82 148
1-year............................................ 5.49 186
2-year............................................ 6.15 184
3-year............................................ 6.46 185
5-year............................................ 6.94 165
10-year........................................... 7.32 141
30-year........................................... 7.61 192
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The first factor is low average loan balance. For example, the
credit unions with under $2,000,000 in assets have an average unsecured
balance of $1,314, with many loans below $1,000. There are fixed costs
of granting and processing a loan. Many of these costs are incurred
regardless of the size of the loan. Expressed as a percentage of the
loan balance on which interest will be collected, these costs can be
very high on small loans. As one credit union states, ``The total
interest earned on a $200 loan at 17 percent for 12 months is $34. Even
at 17 percent it costs us more to make the loan than we recover in
interest income, assuming it does pay to maturity and is not charged
off.'' The Functional Cost and Profit Analysis by the Federal Reserve
System calculates the average cost to a credit union for making an
installment loan to be $95.66 plus $5.49 per payment. The $34 does not
even cover the cost of accepting the twelve payments.
Many banks will not even consider loan applications for less than
$1,000. Lowering the interest rate ceiling for credit unions will
discourage credit unions, too, from making these loans. Credit seekers'
options will be reduced, with most of the affected members having no
choice but to turn to neighborhood lenders.
The second factor is credit risk. Loans to young members who have
not yet established a credit history and loans to those who have built
weak credit histories both carry high credit risk. Credit unions must
charge rates high enough to cover higher-than-usual losses for such
loans. There are undoubtedly more than 1,477 credit unions charging
over 15 percent for unsecured loans to such members. Many credit unions
have ``Credit Builder'' or ``Credit Rebuilder'' loans but must report
the ``most common'' rate on the Call Report for unsecured loans.
The third factor is credit union size. Small credit unions have
fewer loans over which to distribute their overhead costs.
Thus, small credit unions making small loans to borrowers with poor
or no credit histories are struggling with far higher costs than the
typical credit union. Both young people and lower income households
have limited access to credit and, absent a credit union, often pay
rates of 24 to 30 percent to small loan companies. Or they may be
forced to resort to the check-cashing outlet where a post-dated check
will be cashed at effective rates of 200, or even 300, percent. Rates
between 15 and 18 percent are attractive to such members. The higher
rates are necessary to help cover the credit unions' costs of providing
this kind of credit.
Table 2 shows the number of credit unions in each asset-size group
that charge more than 15 percent for unsecured loans. It also shows the
percent of credit unions in each group that do so.
NCUA staff are not aware of any complaints from members of those
credit unions offering high-risk, high-interest rate loans.
Table 2.--Credit Unions Charging More Than 15 Percent on Unsecured Loans
[December 1993]
------------------------------------------------------------------------
Count of Charging GT 15%
all CUs on unsecured
Asset size group of this loans
asset -----------------
size Number Percent
------------------------------------------------------------------------
Less than $2 mln........................... 4,133 430 10.4
$2 mln to $10 mln.......................... 4,272 558 13.1
$10 mln to $50 mln......................... 2,796 339 12.1
Over $50 mln............................... 1,115 150 13.5
----------------------------
Total.................................. 12,317 1,477 12.0
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Among the 1,477 credit unions charging more than 15 percent for
unsecured loans, there are 356 credit unions with 20 percent or more of
their assets in this kind of loan. For these credit unions, lowering
their rates would damage their liquidity, capital, earnings, and
growth. Table 3 shows credit unions charging more than 15 percent that
have more than 20 percent of their assets in these loans. In general
the percent of assets in unsecured loans goes down as credit union size
goes up.
Table 3.--Credit Unions With More Than 20% of Assets in Unsecured Loans
------------------------------------------------------------------------
Avg pcnt
Percent of assets
Asset size group No. of of size in
CUs group unsecured
lns
------------------------------------------------------------------------
Less than $2 mln......................... 198 4.8 37.3
$2 mln to $10 mln........................ 129 3.0 27.9
$10 mln to $50 mln....................... 26 0.9 29.6
Over $50 mln............................. 3 0.3 44.8
------------------------------
Total................................ 356 2.9 31.9
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At the same time, lowering the ceiling would not change the rates
the vast majority of credit unions are charging, since they are already
at or below market. A ceiling can cause rates to be higher than they
would have been without the ceiling. The closer a loan rate is to
actual market rates, the more likely it is that the ceiling will act as
a floor for rates. There are two reasons why this happens. First,
setting a ceiling close to market rates creates the impression that the
ceiling rate is the ``federally approved'' rate. Second, if credit
unions feel they may not have the flexibility to raise rates in the
near future should market rates rise unexpectedly, they are more likely
to keep current rates higher than they otherwise would, as insurance
against market rate increases. This ceiling-as-floor phenomenon
militates against letting the ceiling approach the more common, typical
market rates.
In conclusion, the Board has continued the federal credit union
loan interest rate ceiling of 18 percent per year for the period from
September 9, 1994 through March 8, 1996. Loans and line of credit
balances existing on May 15, 1987 may continue to bear their
contractual rate, not to exceed 21 percent. Finally, the Board is
prepared to reconsider the 18 percent ceiling at any time during the
extension period, should changes in economic conditions warrant it.
Regulatory Procedures
Administrative Procedures Act
The Board has determined that notice and public comment on this
rule are impractical and not in the public interest, 5 U.S.C.
553(b)(B). Due to the need for a planning period prior to the September
9, 1994 expiration date of the current rule, and the threat to the
safety and soundness of individual credit unions with insufficient
flexibility to determine loan rates, final action on the loan rate
ceiling is necessary.
Regulatory Flexibility Act
For the same reasons, a regulatory flexibility analysis is not
required, 5 U.S.C. 604(a). However, the Board has considered the need
for this rule, and the alternatives, as set forth above.
Paperwork Reduction Act
There has been no change in the paperwork requirements.
Executive Order 12612
This final rule does not affect state regulation of credit unions.
It implements provisions of the Federal Credit Union Act applying only
to federal credit unions.
List of Subjects in 12 CFR Part 701
Credit Unions, Loan interest rates.
By the National Credit Union Administration Board on July 26,
1994.
Becky Baker,
Secretary of the Board.
Accordingly, NCUA has amended its regulations as follows:
PART 701--[AMENDED]
1. The authority citation for Part 701 is revised to read as
follows:
Authority: 12 U.S.C. 7152(5), 1755, 1756, 1757, 1759, 1761a,
1761b, 1766, 1767, 1782, 1784, 1787, 1789, 1798. Section 701.6 is
also authorized by 15 U.S.C. 3717. Section 701.31 is also authorized
by 15 U.S.C. 1601 et seq.; 42 U.S.C. 1981 and 3601-3610.
Sec. 701.21 [Amended]
2. Section 701.21(c)(7)(ii)(C) is revised to read as follows:
Sec. 701.21 Loans to members and lines of credit to members.
* * * * *
(c) * * *
(7) * * *
(ii) * * *
(C) Expiration. After March 8, 1996, or as otherwise ordered by the
NCUA Board, the maximum rate on federal credit union extensions of
credit to members shall revert to 15 percent per year. Higher rates
may, however, be charged, in accordance with paragraph (c)(7)(ii)(A)
and (B) of this section, on loans and line of credit balances existing
on or before March 8, 1996.
* * * * *
[FR Doc. 94-18658 Filed 8-2-94; 8:45 am]
BILLING CODE 7535-01-M
