[Federal Register Volume 62, Number 147 (Thursday, July 31, 1997)]
[Rules and Regulations]
[Pages 40928-40930]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19935]


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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, 1997, 
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, 1997 through March 8, 1999. 
Loans and lines of credit balances existing prior to May 18, 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, 1997.

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

FOR FURTHER INFORMATION CONTACT: Evan Gillette, Investment Officer, 
Office of Investment Services, 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 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 
Treasury and other federal financial agencies, for a period not to 
exceed 18 months, if the Board determined 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 believes that the 18 percent ceiling will permit credit 
unions to continue to meet their current lending programs, permit 
flexibility so that credit unions can react to any adverse economic 
developments, and ensure that any increase in the cost of funds would 
not affect the safety and soundness of federal credit unions.
    The Board would prefer not to set loan interest rate ceilings for 
federal credit unions. Credit unions are cooperatives and balance loan 
and share rates consistent with the needs of their members and 
prevailing market 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 
their 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 conditions 
warrant. 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.

Money Market Interest Rates

    During the 16-month period following the Board's March 1996 
decision to continue the 18 percent ceiling, short-term Treasury rates 
(3, 6 and 12 months) increased from 11 to 19 basis points (Table 1).

                        Table 1.--Treasury Rates                        
------------------------------------------------------------------------
                                           Yields as  Yields as   Change
                                            of Mar.    of July      in  
                 Maturity                   11, 1996   17, 1997   basis 
                                           (percent)  (percent)   points
------------------------------------------------------------------------
3-month..................................      5.09       5.20        11
6-month..................................      5.17       5.31        14
1-year...................................      5.37       5.56        19
------------------------------------------------------------------------

    Treasury rates rose slightly during the recent six-month period 
from January 1 to July 17, 1997. Treasury rates on the 3, 6 and 12 
month maturities increased

[[Page 40929]]

between 1 and 7 basis points (Table 2). During this period, the Federal 
Reserve (Fed) increased the overnight Fed Funds rate by 25 basis points 
to a target rate of 5.50 percent.

                        Table 2.--Treasury Rates                        
------------------------------------------------------------------------
                                           Yields as  Yields as   Change
                                            of Jan.    of July      in  
                 Maturity                   1, 1997    17, 1997   basis 
                                           (percent)  (percent)   points
------------------------------------------------------------------------
3-month..................................      5.19       5.20         1
6-month..................................      5.30       5.31         1
1-year...................................      5.49       5.56         7
------------------------------------------------------------------------

    There are also expectations that rates may rise in the months 
ahead. The US economy has continued to expand. Since early 1996, 
employment growth and labor force participation has been quite strong, 
with unemployment rates declining from 5.6 percent (Dec. 1995) to 5.0 
percent (June 1997).
    Further declines in the unemployment rate, rising consumer 
confidence, continued income growth and a strong equity market have 
lead many to be concerned that consumer demand may rise at a faster 
pace in the months ahead. This could result in inflationary pressures 
and higher interest rates. Therefore, it is important to maintain the 
18 percent ceiling. Lowering the interest rate ceiling at this time 
could cause an unnecessary burden on credit unions.

Financial Implications for Credit Unions

    For at least 871, 28% \1\ of the reporting credit unions, the most 
common rate on unsecured loans was above 15 percent. While the bulk of 
credit union lending is below 15 percent, small credit unions and 
credit unions that have instituted risk based lending programs require 
interest rates above 15 percent to maintain liquidity, capital, 
earnings and growth.
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    \1\ Of the 7,152 FCUs, 4,083 had zero balances in the 15 percent 
and above category or did not report a balance for the year-end 1996 
reporting period.
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    Loans to members who have not yet established a credit history or 
have weak credit histories have more credit risk. Credit unions must 
charge rates to cover the potential of higher than usual losses for 
such loans. There are undoubtedly more than 871 credit unions charging 
over 15 percent for unsecured loans to such members. Many credit unions 
have ``Credit Builder'' or ``Credit Rebuilder'' loans but only report 
the ``most common'' rate on the Call Report for unsecured loans. 
Lowering the interest rate ceiling for credit unions will discourage 
credit unions from making these loans. Credit seekers' options will be 
reduced and most of the affected members will have no alternative but 
to turn to other lenders who will charge much higher rates.
    Small credit unions will be particularly affected by a lower loan 
ceiling since they tend to have a higher level of unsecured loans, 
typically with lower loan balances. 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 other lenders. 
Rates between 15 and 18 percent are attractive to such members.
    Table 3 shows the number of credit unions in each asset group where 
the most common rate is more than 15 percent for unsecured loans.

  Table 3.--Federal Credit Unions With Most Common Unsecured Loan Rates 
                 Greater Than 15 Percent (December 1996)                
------------------------------------------------------------------------
                                                               Number of
                                                       Total    FCUs w/ 
              Peer group by asset size                  all       loan  
                                                        FCUs   rates>15%
------------------------------------------------------------------------
$0-2 mil............................................    2,132       231 
$2-10 mil...........................................    2,490       317 
$10-50 mil..........................................    1,733       208 
$50 mil +...........................................      797       115 
                                                     -------------------
    Total \1\.......................................    7,152      871  
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\1\ Of this total, 4,083 had either a zero balance or did not report    
  rate balances 15 percent and above.                                   

    Among the 871 credit unions where the most common rate is more than 
15 percent for unsecured loans, 242 have 20 percent or more of their 
assets (Table 4) in this category. For these credit unions, lowering 
the rates would damage their liquidity, capital, earnings and growth.

  Table 4.--Federal Credit Unions With Most Common Unsecured Loan Rates 
 Greater Than 15 Percent and More Than 20 Percent of Assets in Unsecured
                          Loans (December 1996)                         
------------------------------------------------------------------------
                                                      Avg.     Number of
                                                   percentage     FCUs  
             Peer group by asset size                of loan    meeting 
                                                   rates >15%     both  
                                                    to assets   criteria
------------------------------------------------------------------------
$0-2 mil.........................................        43.8        108
$2-10 mil........................................        29.6         75
$10-50 mil.......................................        26.8         45
$50 mil +........................................        24.9         14
                                                  ----------------------
    Total........................................        35.1        242
------------------------------------------------------------------------

    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, 1997, through March 8, 1999. Loans and line of credit 
balances existing on May 16, 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 in economic conditions warrant.

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 September 
9, 1997, 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 of 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

    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, Credit unions, Loan interest rates.


[[Page 40930]]


    By the National Credit Union Administration Board on July 23, 
1997.
Becky Baker,
Secretary of the Board.
    Accordingly, NCUA amends 12 CFR chapter VII 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. 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. 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:


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

* * * * *
    (c) * * *
    (7) * * *
    (ii) * * *
    (C) Expiration. After March 8, 1999, 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 March 8, 1999.
* * * * *
[FR Doc. 97-19935 Filed 7-30-97; 8:45 am]
BILLING CODE 7535-01-U