[Federal Register Volume 61, Number 24 (Monday, February 5, 1996)]
[Rules and Regulations]
[Pages 4213-4215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-2016]



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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 March 9, 1996, 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 March 9, 1996 through September 8, 1997. Loans and 
lines 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: March 9, 1996.

ADDRESSES: National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia, 22314-3428.

FOR FURTHER INFORMATION CONTACT:
James F. Feeney, Office of Investment Services, Senior Investment 
Officer, at the above address. Telephone number: (703) 518-6620.

SUPPLEMENTARY INFORMATION:

Background

    Public Law 96-221, enacted in 1979, raised the loan interest rate 
ceiling for federal credit 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 consulting 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: (1) money 
market interest rates have risen over the preceding 6 months; and (2) 
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 18, 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 loan 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

    During the six-month period following the Board's July 1994 
decision to continue the 18 percent ceiling, short-term money market 
rates increased about 150 basis points. For example, the two-year 
treasury note increased in yield from 6.15 percent to 7.69 percent for 
a gain of 154 basis points and a 25 percent change (see table 1).

                  Table 1.--Money Market Interest Rates                 
------------------------------------------------------------------------
                                             Yields    Yields           
                                              as of     as of    Change 
                 Maturity                    July 1,  December  in basis
                                              1994    30, 1994   points 
------------------------------------------------------------------------
3-month...................................      4.29      5.68       139
6-month...................................      4.82      6.50       168
1-year....................................      5.49      7.16       167
2-year....................................      6.15      7.69       154
3-year....................................      6.46      7.78       132
5-year....................................      6.94      7.83        89
------------------------------------------------------------------------

    During the recent six-month period from July through December 1995, 
short-term money market rates decreased about 50 basis points. For 
example, the rate on the two-year treasury note dropped 60 basis points 
from 5.79 percent to 5.19 percent for a 10 percent change (see table 
2). Although interest rates have fallen since July 1995, there is no 
assurance that they will remain at current levels during the period of 
this extension (from March 9,1996 through September 8, 1997). Most 
economists believe that rates will fall a bit further in early 1996 and 
then rise in the fourth quarter of 1996 or early in 1997.
    Despite the market improvement in interest rates in the last six 
months, the NCUA board believes that, in view of the uncertain outlook 
for interest over the next 18 months, lowering the interest rate 
ceiling at this time could cause an unnecessary burden on credit 
unions, especially those with 20% or more of their assets in high-
interest rate loans.

                  Table 2.--Money Market Interest Rates                 
------------------------------------------------------------------------
                                             Yields    Yields           
                                              as of     as of    Change 
                 Maturity                    July 1,  December  in basis
                                              1995    30, 1995   points 
------------------------------------------------------------------------
3-month...................................      5.60      5.12        48
6-month...................................      5.60      5.18        42
1-year....................................      5.62      5.16        46
2-year....................................      5.79      5.19        60

[[Page 4214]]
                                                                        
3-year....................................      5.85      5.25        60
5-year....................................      5.96      5.41        55
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Liquidity, Capital, Earnings and Growth of Individual Credit Unions

    For at least 1,673 (14%) credit unions, market conditions call for 
rates on unsecured loans to be above 15%. 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. 
The first factor is low average loan balance. For example, credit 
unions with under $2 million in assets have many unsecured loans with 
loan balances below $1000.
    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 loan balance on which interest will be collected, 
these costs can be very high on small loans.
    Many other types of financial institutions will not even consider 
loan applications for less than $1000. 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 alternative 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 sufficiently high enough to cover higher-than usual losses 
for such loans. There are undoubtedly more than 1,673 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 members 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. 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 3 shows the number of credit unions in each asset 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 is not 
aware of any complaints from members of those credit unions offering 
high-risk, high-interest rate loans.

Table 3.--Credit Unions Charging More Than 15 Percent on Unsecured Loans
                             as of June 1995                            
------------------------------------------------------------------------
                                            Count of  Charging more than
                                             all CUs   15% on unsecured 
             Asset size group                 this           loans      
                                              asset  -------------------
                                              size     Number    Percent
------------------------------------------------------------------------
Less than $2MM............................     3,666       386      10.5
$2MM to $10MM.............................     4,157       613      14.7
$10MM to $50MM............................     2,813       459      16.3
Over $50MM................................     1,200       215      17.9
      Total...............................    11,836     1,673      14.1
------------------------------------------------------------------------

    Among the 1,673 credit unions charging more than 15 percent for 
unsecured loans, there are 367 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 4 shows credit unions charging more than 15 percent that have 
more than 20 percent of their assets in these loans.

Table 4.--Credit Unions With More Than 20 Percent of Assets in Unsecured
                          Loans as of June 1995                         
------------------------------------------------------------------------
                                                                Average 
                                                                percent 
                                            Number    Percent  of assets
             Asset size group               of CUs    of size      in   
                                                       group   unsecured
                                                                 loans  
------------------------------------------------------------------------
Less than $2MM...........................       152       4.1      381.1
$2MM to $10MM............................       133      3.2%       26.9
$10MM to $50MM...........................        65       2.3       26.7
Over $50MM...............................        17       1.4       25.5
      Total..............................       367       3.1       31.4
------------------------------------------------------------------------

    In conclusion, the Board has continued the federal credit union 
loan interest rate ceiling of 18 percent per year for the period from 
March 9, 1996 through September 8, 1997. Loans and line of credit 
balances existing on May 15, 1987 may continue to bear interest at 
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 to economic conditions warrant it.

Regulatory Procedures

Administrative Procedure 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 March 8, 
1996 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 are no paperwork requirements.

Executive Order 12612

    The 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, Credit unions, Loan interest rates.

    By the National Credit Union Administration Board on January 25, 
1996.
Becky Baker,
Secretary of the Board.

    Accordingly, NCUA amends 12 CFR part 701 as follows:

PART 701--[AMENDED]

    1. The authority citation for part 701 is revised to read as 
follows:

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 
1761b, 1766, 1767, 1782, 1784, 1787, 1789, 1798. Section 701.6 is 
also authorized by 31 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. Section 
701.35 is also authorized by 42 U.S.C. 4311-4312.

    2. Section 701.21(c)(7)(ii)(C) is revised to read as follows:
    
[[Page 4215]]



Sec. 701.21  Loans to members and lines of credit to members.

* * * * *
    (c) * * *
    (7) * * *
    (ii) * * *
    (C) Expiration. After September 8, 1997, 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 paragraphs (c)(7)(ii) (A) 
and (B) of this section, on loans and line of credit balances existing 
on or before September 8, 1997.
* * * * *
[FR Doc. 96-2016 Filed 2-2-96; 8:45 am]
BILLING CODE 7535-01-M