[Federal Register Volume 65, Number 140 (Thursday, July 20, 2000)]
[Rules and Regulations]
[Pages 44974-44977]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-18277]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701


Loan Interest Rates

AGENCY: National Credit Union Administration.

ACTION: Final rule.

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SUMMARY: The current 18 percent per year federal credit union loan rate 
is scheduled to revert to 15 percent on September 9, 2000, 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 September 9, 2000, through March 8, 2002. 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.

DATES: Effective August 21, 2000.

FOR FURTHER INFORMATION CONTACT: Daniel Gordon, Senior Investment 
Officer, (703) 518-6623.

SUPPLEMENTARY INFORMATION:

[[Page 44975]]

Background

    Public Law 96-221, enacted in 1979, raised the loan interest rate 
ceiling for federal credit unions from one 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 six 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 nine months to 21 percent. In the unstable environment of the 
first-half of the 1980s, 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 interest 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.

Recent Economic Activity

    A number of measures of inflation continue to reflect price 
pressures on the economy. The Gross Domestic Price Deflator, a broad 
measure of inflation, rose at a three percent annual rate in the first 
quarter, the largest increase since a similar rise in the first quarter 
of 1995. The Consumer Price Index rose 3.1 percent from May 1999 
through May 2000, compared to 2.7 percent for all of last year. The 
personal consumption expenditure price index, a separate measure tied 
to Gross Domestic Product, rose at a 3.1 percent annual pace in the 
first quarter, above the 2.5 percent rate of increase in the last three 
months of 1999.
    The economy is continuing to expand at a rapid rate increasing 
inflationary concerns. Gross Domestic Product grew at a very strong 5.5 
percent annual rate in the first three months of this year, after a 7.3 
percent increase in the fourth quarter of 1999 and a 5.7 percent rise 
in the third quarter of 1999. Consumer spending, which has been the 
engine of this long-term expansion, soared at 7.7 percent annual rate 
in the first quarter of 2000, the largest increase in 17 years. The 
University of Michigan's measure of consumer confidence remains close 
to the level reached last year, suggesting high consumer spending will 
be sustained.

Money Market Interest Rates

    Inflationary concerns and expectations about the future level of 
economic activity have led to a substantial tightening by the Federal 
Reserve. Table 1 indicates that the Federal Reserve has raised its 
target fed funds rate six times between June 1999, when the target rate 
was increased from 4.75 percent to 5.00 percent, and June 2000, when 
the target rate was increased 50 basis points from 6.00 to 6.50 
percent. In choosing to raise rates in May 2000, the Federal Reserve 
concluded that gains in worker productivity ``could no longer'' offset 
the impact of higher costs.
    The 6.50 percent target rate is the highest such target in nine 
years. Although the Federal Reserve chose not to raise the target rate 
again last month, its accompanying statement suggested inflation is 
still of substantial concern. In its official statement, the Federal 
Reserve indicated that ``the risks continue to be weighted mainly 
toward conditions that may generate heightened inflation pressures in 
the foreseeable future * * * [s]igns that growth in demand is moving to 
a sustainable pace are still tentative and preliminary.''
    Individual Federal Reserve officials have elaborated on the Federal 
Reserve's official statement. For example, the President of the Chicago 
Federal Reserve, Moskow, said, ``we still are in a period where 
aggregate demand is growing at a pace that is exceeding potential 
supply. * * * I haven't seen any significant adjustment up to this 
point.'' Richmond Federal Reserve President Broaddus said that core 
prices, excluding food and energy prices, ``have shown signs of 
acceleration.''
    The implied rate on futures contracts for September is 6.70 
percent, suggesting financial markets anticipate another increase in 
the fed funds target rate at the August Federal Reserve Open Market 
Committee meeting.

    Table 1.--Recent Changes in Federal Reserve Target Fed Funds Rate
------------------------------------------------------------------------
                                                             Fed funds
                          Date                              target rate
                                                             (percent)
------------------------------------------------------------------------
May 2000................................................            6.50
March 2000..............................................            6.00
February 2000...........................................            5.75
November 1999...........................................            5.50
August 1999.............................................            5.25
June 1999...............................................            5.00
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    Table 2 shows that that in the last six months there has been an 
increase in interest rates in the three-month to two-year maturities, 
of greatest relevance to a credit union's cost of funds.

                                    Table 2.--Yields on Government Securities
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                                                        December 31, 1999       June 30, 2000         Change
                      Maturity                              (percent)             (percent)          (percent)
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3 month.............................................                  5.31                  5.82             .51
6month..............................................                  5.73                  6.19             .47
1 year..............................................                  5.96                  6.05             .09
2 year..............................................                  6.24                  6.35             .11
5 year..............................................                  6.34                  6.19            -.16
10 year.............................................                  6.44                  6.03            -.41

[[Page 44976]]

 
30 year.............................................                  6.48                  5.88            -.60
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Financial Implications For Credit Unions

    For at least 731 credit unions, representing 11\1\ percent 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 731 federal 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 ceilng for federal credit unions would discourage 
these 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 6489 federal credit unions, 5,002 had zero balances 
in the 15 percent and above unsecured loan rate category or did not 
report a balance for the December 1999 reporting period.
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    Small credit unions would be particularly affected by lower loan 
rate ceilings 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.--Active Federal Credit Unions with Most Common Unsecured Loan
                      Rates Greater Than 15 Percent
                             [December 1999]
------------------------------------------------------------------------
                                                 Total all    Number of
           Peer group by asset size                 FCUs        FCUs *
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$0-2 million..................................        1,697          178
$2-10 million.................................        2,212          258
$10-50 million................................        1,725          202
$50 million+..................................          855           93
      Total...................................        6,489         731
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* With Loan Rates equal or greater than 15 percent.

    Among the 731 credit unions where the most common rate is more than 
15 percent for unsecured loans, 121 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.--Active Federal Credit Unions With Most Common Unsecured Loan
   Rates Greater Than 15 Percent and More Than 20 Percent of Assets in
                             Unsecured Loans
                             [December 1999]
------------------------------------------------------------------------
                                                  Average
                                                 percentage   Number of
                                                  of loan     FCUs with
                                                   rates      loan rates
           Peer group by asset size               greater      equal or
                                                  than 15      greater
                                                 percent to    than 15
                                                   total       percent.
                                                   assets
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$0-2 million..................................           40           81
$2-10 million.................................           28           32
$10-50 million................................           36            5
$50 million+..................................           21            3
                                               -------------------------
    Total.....................................          125          121
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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 
September 9, 2000 to March 8, 2002. 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 notification 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 
September 9, 2000, 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

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a regulation may have on a 
substantial number of small credit unions (those under one million 
dollars in assets). This final rule provides added flexibility to all 
federal credit unions regarding the permissible interest rate that may 
be used in connection with lending. The NCUA Board has determined and 
certifies that this rule will not have a significant economic impact on 
a substantial number of small credit unions.

Paperwork Reduction Act

    NCUA has determined that this rule does not increase paperwork 
requirements under the Paperwork Reduction Act of 1995 and regulations 
of the Office of Management and Budget.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their regulatory actions on state and local 
interest. In adherence to fundamental federalism principles, NCUA, an 
independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order. This rule applies only 
to federal credit unions and, thus, will not have substantial direct 
effects on the states, on the relationship between the national 
government and the states, nor materially affect state interests. The 
NCUA has determined that the rule does not constitute a policy that has 
any federalism implication for purposes of the executive order.

[[Page 44977]]

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) provides generally for congressional review of agency 
rules. A reporting requirement is triggered in instances where NCUA 
issues a final rule as defined by Section 551 of the Administrative 
Procedure Act. 5 U.S.C. 551. NCUA has recommended to the Office of 
Management and Budget that it determine that this is not a major rule 
and is awaiting its determination.

The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    NCUA has determined that this rule will not affect family well-
being within the meaning of Section 654 of the Treasury and General 
Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 2681 
(1998).

List of Subjects in 12 CFR Part 701

    Credit, Credit unions, Loan interest rates.

    By the National Credit Union Administration Board on July 13, 
2000.
Becky Baker,
Secretary to the Board.

    Accordingly, NCUA amends 12 CFR chapter VII as follows:

PART 701--ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS 
(AMENDED)

    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 March 8, 2002, 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 balance existing 
on or before May 16, 1987.
* * * * *

[FR Doc. 00-18277 Filed 7-19-00; 8:45 am]
BILLING CODE 7535-01-U