[Federal Register Volume 67, Number 32 (Friday, February 15, 2002)]
[Rules and Regulations]
[Pages 7057-7059]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-3701]


=======================================================================
-----------------------------------------------------------------------

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 701


Loan Interest Rates

AGENCY: National Credit Union Administration.

ACTION: Final rule.

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

SUMMARY: The current 18 percent per year federal credit union loan rate 
is scheduled to revert to 15 percent on March 8, 2002, 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 March 8, 2002 through September 8, 2003. 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 March 8, 2002.

FOR FURTHER INFORMATION CONTACT: Daniel Gordon, Senior Investment 
Officer, telephone 703-518-6620.

SUPPLEMENTARY INFORMATION:

Background

    Public Law 96-221, enacted in 1980, 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 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 and permit 
flexibility so that credit unions can react to any adverse economic 
developments.
    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

[[Page 7058]]

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

    Table 1 below shows that interest rates rose between January 11 and 
February 5 as the nation continues to recover from the combination of 
the recession and the September 11 terrorist attack.

             Table 1.--Yields on U.S. Government Securities
                                [Percent]
------------------------------------------------------------------------
                Maturity                  Jan. 11     Feb. 5     Change
------------------------------------------------------------------------
3 month................................       1.55       1.75        .20
6 month................................       1.62       1.85        .23
2 year.................................       2.72       2.98        .26
5 year.................................       4.09       4.20        .11
10 year................................       4.86       4.89        .03
------------------------------------------------------------------------

    Table 2 shows that interest rates on maturities of five years and 
longer have increased since September 13.

       Table 2.--Yields on Longer Term U.S. Government Securities
                                [Percent]
------------------------------------------------------------------------
                Maturity                  Sept. 13    Feb. 5     Change
------------------------------------------------------------------------
5 year.................................       3.95       4.20        .25
10 year................................       4.62       4.89        .27
------------------------------------------------------------------------

    There is also evidence in financial markets to suggest that rates 
are likely to rise in the months ahead. A consensus forecast of 
economists anticipates higher interest rates this year. In addition, 
the implied forward curve for U.S. Government securities, a sign of 
market expectations, indicates that the yields on Treasury securities 
will be higher in the upcoming year.
    There are also indications the economy is improving. For example, 
Federal Reserve Chairman Greenspan recently said, ``(t)here have been 
signs recently that some of the forces that have been restraining the 
economy over the past year are starting to diminish and that activity 
is beginning to firm.'' The Federal Reserve's Open Market Committee, 
supporting this view, chose to retain the target fed funds rate rather 
than lowering it again. Gross Domestic Product showed a 0.2 percent 
increase in the last quarter of 2001. The Conference Board's index of 
consumer sentiment increased to 97.3 in January from 94.6 in December. 
This represents a 5-month high. Rising consumer confidence typically 
results in more discretionary consumer expenditures.Thus improved 
consumer confidence is another positive sign for the economy.Typically, 
as the economy improves interest rates increase. Therefore, there are 
signs in the economy as a whole, and in the financial markets in 
particular, to suggest interest rates will be higher in the future.

Financial Implications for Credit Unions

    For at least 712 credit unions, representing 11.5 \1\ percent of 
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 712 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 ceiling for federal credit unions would discourage 
these credit unions from making these loans and many of the affected 
members would have no alternative but to turn to other lenders who 
charge much higher rates.
---------------------------------------------------------------------------

    \1\ Of the 6,186 federal credit unions, 3,412 zero balances in 
the unsecured loan rate categories for the June 2001 reporting 
period.
---------------------------------------------------------------------------

    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. 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.
    In addition, credit unions have been actively attempting to 
increase service to lower-income members and those with marginal credit 
histories. There has been a significant increase in the number of 
credit unions engaging in risk-based lending. Imposition of a lower 
ceiling would substantially constrain these risk-based lending 
programs.
    In addition, should the interest rate charged on loans be subject 
to a 15 percent ceiling credit unions, where the majority of members 
are low-income, will incur significant financial strain. Although the 
percentage of all low-income designated credit unions reporting loan 
interest rates greater than 15 percent is comparable to the general 
federal credit union population (13.9 percent versus 11.9 percent), an 
analysis of low-income credit unions with assets less than $10 million 
reveal a much more significant impact.

 Table 3.--Active Federal Credit Unions With Most Common Unsecured Loan
                      Rates Greater Than 15 Percent
                               [June 2001]
------------------------------------------------------------------------
                                                              Number of
                                                              FCUs with
           Peer group by asset size              Total all     greater
                                                    FCUs       than 15
                                                               percent
------------------------------------------------------------------------
$0-2 million..................................        1,496          153
$2-10 million.................................        2,044          269
$10-50 million................................        1,736          189
$50 million+..................................          910          101
                                               -------------------------
    Total.....................................        6,186          712
------------------------------------------------------------------------

    Among the 712 credit unions where the most common rate is more than 
15 percent for unsecured loans, 105 have 20 percent or more of their 
assets (Table 4) in this category. For these credit unions, lowering 
the rates would threaten 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
                               [June 2001]
------------------------------------------------------------------------
                                                              Number of
                                                              FCUs with
                                                              loan rates
                  Peer group by asset size                     greater
                                                               than 15
                                                               percent
------------------------------------------------------------------------
$0-2 million...............................................           51
$2-10 million..............................................           42
$10-50 million.............................................           57
$50 million+...............................................           32
                                                            ------------
    Total..................................................          105
------------------------------------------------------------------------

    Data from June 2001 reveals that of those credit unions reporting 
loan interest rates in excess of 15 percent:
     49 of the 150 federal credit unions (32.7 percent) with 
less than $2 million in assets are low-income;

[[Page 7059]]

     79 of the 286 federal credit unions (27.6 percent) with 
less than $5 million in assets are low-income, and
     97 of the 416 federal credit unions (23.3 percent) with 
less than $10 million in assets are low-income.
    These credit unions offset the cost of generating low-balance loans 
through the increased interest rates charged. They generally do not 
have the ability to provide credit card loans and instead grant closed 
and open-ended loans with the prerequisite underwriting documentation. 
Further these smaller credit unions generally maintain a higher expense 
ratio since many are involved with high-transaction accounts that 
require higher personnel costs and related operational expenses, and do 
not have economies of scale.
    The Board has concluded that conditions exist to retain the federal 
credit union interest rate ceiling of 18 percent per year for the 
period March 8, 2002 to September 8, 2003. Loans and line of credit 
balances existing on or before May 14, 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 March 
8, 2002, 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 andBudget.

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.

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. The Office of Management and Budget has 
determined that this is not a major rule.

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 February 7, 
2002.
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 September 8, 2003, 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 September 8, 2003.
* * * * *

[FR Doc. 02-3701 Filed 2-14-02; 8:45 am]
BILLING CODE 7535-01-P