[Federal Register Volume 64, Number 25 (Monday, February 8, 1999)]
[Rules and Regulations]
[Pages 5927-5929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2843]



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  Federal Register / Vol. 64, No. 25 / Monday, February 8, 1999 / Rules 
and Regulations  

[[Page 5927]]


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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, 1999, 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, 1999 through September 8, 2000. 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: March 9, 1999.

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

FOR FURTHER INFORMATION CONTACT: Dan Gordon, Senior Investment Officer, 
Office of Investment Services, at the above address or telephone: (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 the 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 lowered the loan rate ceiling form 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 that balance loan 
and share rates consistent with the needs of their members and 
prevailing market interest rates.
    The Board supports free lending markets and the ability of federal 
credit unions 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 actions at any time should 
changes in economic conditions warrant.

Money Market Interest Rates

    Interest rates and the expectations about the future level of 
economic activity have recently been dominated by concerns in worldwide 
financial markets. The downfall of many Asian economies and the 
unprecedented recession in Japan required the Federal Reserve, as the 
central bank most capable of preventing a world-wide economic downturn, 
to substantially lower interest rates in early October of last year. 
There are now indications that the actions taken at that time had the 
intended effect. Several of the Asian economics have recently shown 
signs of recovery and Japan, recognizing its vulnerability, has 
undertaken a massive fiscal stimulus package.
    The result is that inflation fears in the United States, which only 
recently were overshadowed by the Asian economic crisis, are 
reemerging. With the economy still growing in excess of 3.5 percent per 
annum, and recovery now underway in foreign economies, there are 
concerns that conditions exist for further inflationary pressures. The 
recent credit squeeze in financial markets, reflected by tighter bank 
credit standards and wider credit spreads, has reduced capital 
expenditures, and thus future productivity gains. Yet the strong 
productivity gains were a primary factor preventing price increase in 
the last few years.
    The potential scarcity of capital, the prospective improvement in 
the world economies, and the expectation that oil prices could recover 
from their now 12-year lows and commodity prices from their 22-year 
lows will increase inflationary expectations. In addition, strong 
consumer confidence, a strong housing market and continued expansion in 
consumer spending will continue to put pressure on the economy. With 
unemployment remaining in the 4.5 percent range, and the continued 
strong demand for workers, wage pressures will increase. In addition, 
as less skilled workers are employed and firms are required to use more 
scarce resources, the pressures on costs, and thus on prices, will 
intensify. The result may well be further increases in interest rates.
    Reinforcing the expectation of higher rates, the Federal Reserve 
has strongly suggested it will not lower rates again in the near term. 
The result has been an expectation in financial markets that

[[Page 5928]]

interest rates could rise above current levels. Already there have been 
substantial increases in yields since lows reached in early October. 
For example, on October 1, 1998, the rate on the 6-month Treasury was 
4.36 percent, and on January 5, 1999, it was 4.54 percent. The 5-year 
Treasury rate was 4.55 percent on January 4, 1999. This was 48 basis 
points above the rate on October 1, 1998, while the 10-year Treasury 
rate increased 39 basis points in the same interval. Therefore, 
although the current rates are below the rates of six months ago, there 
is every indication that by March 9, 1999, rates will be higher than 
they were on October 1.

                                            Table 1.--Treasury Rates
----------------------------------------------------------------------------------------------------------------
                                                                   Yields as of    Yields as of
                                                                    October 1,      January 4,       Change in
                            Maturity                                   1998            1999        basis points
                                                                     (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
3-month.........................................................            4.22            4.67              25
6-month.........................................................            4.36            4.54              18
1-year..........................................................            4.27            4.57              30
2-year..........................................................            4.15            4.56              41
5-year..........................................................            4.07            4.55              48
10-year.........................................................            4.29            4.67              38
30-year.........................................................            4.88            5.15              27
----------------------------------------------------------------------------------------------------------------

    The fact that long-term rates exceed short-term rates (for example, 
the 30-year rate is 61 basis points above the 6-month rate) is more 
evidence that the market expects rates to rise in the months ahead. 
Investors are unwilling to hold longer term investments unless they are 
compensated for these potentially higher future rates.
    Further declines in the unemployment rate, rising consumer 
confidence, continued income growth and a strong equity market have led 
many to be concerned that consumer demand may rise at a faster pace in 
the months ahead. We need to be aware of these potential inflationary 
pressures which could result in 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 873 credit unions, representing 28 percent \1\ of the 
reporting federal 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. 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 873 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 would discourage credit 
unions from making these loans. Credit seekers' options would be 
reduced and most of the affected members would have no alternative but 
to turn to other lenders who will charge much higher rates.
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    \1\ Of the 6,907 FCUs, 4,083 had zero balances in the 15 percent 
and above category or did not report a balance for the June 1998 
reporting period.
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    Small credit unions would 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 2 shows the number of credit unions in each asset group where 
the most common rate is more than 15 percent for unsecured loans.

  Table 2.--Federal Credit Unions With Most Common Unsecured Loan Rates
                         Greater Than 15 Percent
                               [June 1998]
------------------------------------------------------------------------
                                                                 Number
                                                                FCUs w/
             Peer group by asset size               Total all     loan
                                                       FCUs      rates
                                                                  >15%
------------------------------------------------------------------------
$0-2 mil..........................................      1,940        214
$2-10 mil.........................................      2,390        334
$10-50 mil........................................      1,735        214
$50 mil+..........................................        842        111
                                                   ---------------------
    Total 1.......................................      6,907        873
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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 3) in this category. For these credit unions, lowering 
the rates would damage their liquidity, capital, earnings, and growth.

  Table 3.--Federal Credit Unions With Most Common Unsecured Loan Rates
 Greater Than 15 Percent and More Than 20 Percent of Assets in Unsecured
                                  Loans
                               [June 1998]
------------------------------------------------------------------------
                                                      Avg.       Number
                                                   percentage     FCUs
             Peer group by asset size                of loan    meeting
                                                   rates >15%     both
                                                    to assets   criteria
------------------------------------------------------------------------
$0-2 mil.........................................       38.31         95
$2-10 mil........................................       28.46         61
$10-50 mil.......................................       25.62         22
$50 mil+.........................................       23.34          7
                                                  ----------------------

[[Page 5929]]

 
    Total........................................       32.99        185
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    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, 1999, through September 9, 2000. 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)(3)(B). Due to the need for a planning period prior to the March 
9, 1999, 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.

    By the National Credit Union Administration Board on January 28, 
1999.
Becky Baker,
Secretary of the Board.

    Accordingly, NCUA amends 12 CFR ch. VII as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS

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

    Authority: 12 U.S.C. 1752(5), 1755, 1756, 1757, 1759, 1761a, 
1761b, 1766, 1767, 1782, 1784, 1787, and 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 September 9, 2000, 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 May 16, 1987.
* * * * *
[FR Doc. 99-2843 Filed 2-5-99; 8:45 am]
BILLING CODE 7535-01-U