[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
------------------------------------------------------------------------

    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
------------------------------------------------------------------------

    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 
------------------------------------------------------------------------

    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