[Federal Register Volume 68, Number 151 (Wednesday, August 6, 2003)]
[Rules and Regulations]
[Pages 46439-46441]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-19988]


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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 maximum 
loan rate is scheduled to revert to 15 percent on September 9, 2003, 
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, 2003 through March 8, 2005. The 
Board is prepared to reconsider the 18 percent ceiling at any time 
should changes in economic conditions warrant.

DATES: Effective September 5, 2003.

FOR FURTHER INFORMATION CONTACT: Daniel Gordon, Senior Investment 
Officer, Office of Strategic Program Support and Planning, at the 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428, or 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. 12 U.S.C. 1757(5)(A)(vi). The 
law 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 
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 retaining the 18 percent ceiling will permit credit unions to 
continue to meet their current lending programs and permit the 
necessary flexibility for credit unions to 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 establish 
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, however, has imposed loan rate ceilings since 1934, and, 
as stated previously, in 1980, 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

    Although money market interest rates have generally declined, the 
Board of Governors of the Federal Reserve System's (the FRB's) 
aggressive monetary policy and larger anticipated federal budget 
deficits suggest money market rates will rise in the months

[[Page 46440]]

ahead. Recent statements by the FRB Chairman Alan Greenspan and other 
FRB officials suggest they anticipate stronger growth in the remaining 
months of 2003. This growth also would lead to higher money market 
interest rates.
    These expectations are revealed in the implied forward yield curve 
for the United States Treasury securities. As of July 11, 2003, the 
forward yield curve anticipates that: the one-year Treasury yield will 
rise 51 basis points; the two-year Treasury will rise 63 basis points; 
and the five-year Treasury will rise 57 basis points by July 11, 2004. 
In addition, recently there has been an increase in current interest 
rates, as follows in Table 1:

                                   Table 1.--Change in U.S. Government Yields
                                           June 13, 2003-July 11, 2003
----------------------------------------------------------------------------------------------------------------
                  Maturity                   Rate 6/13/03  (percent)  Rate 7/11/03  (percent)  Change  (percent)
----------------------------------------------------------------------------------------------------------------
3-month....................................                   .85                      .88                   .03
6-month....................................                   .94                      .94                   .10
2-year.....................................                  1.08                     1.33                   .25
3-year.....................................                  1.31                     1.66                   .35
5-year.....................................                  1.03                     2.52                   .49
10-year....................................                  3.11                     3.67                   .57
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    Lowering the ceiling now, only to revise it upward in several 
months, would be disruptive to credit unions, as discussed below.

Financial Implications for Credit Unions

    For at least 499 federal credit unions, representing 8.5 percent of 
reporting federal credit unions, the most common rate on unsecured 
loans was above 15 percent at year-end 2002. While the bulk of credit 
union lending is below 15 percent, small credit unions and credit 
unions that have implemented 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 
credit histories 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 499 federal credit unions charging 
over 15 percent for unsecured loans to such members. Many credit unions 
have ``credit builder'' or ``credit rebuilder'' loans but report only 
the most common unsecured loan rates on NCUA Call Reports. Lowering the 
interest rate ceiling for federal credit unions would discourage these 
credit unions from making certain loans and many of the affected 
members would have no alternative but to turn to other lenders who 
charge higher rates.
    Small credit unions would be particularly affected by lower loan 
rate ceilings since they tend to have higher levels of unsecured loans, 
typically with lower loan balances. Table 2 shows the number of federal 
credit unions in each asset group where the most common rate is more 
than 15 percent for unsecured loans.

 Table 2.--Active Federal Credit Unions With Most Common Unsecured Loan
                      Rates Greater Than 15 Percent
                              December 2002
------------------------------------------------------------------------
                                                              Number of
                                                              FCUs with
    Peer group by asset size  (in millions)      Total all     greater
                                                    FCUs       than 15
                                                               percent
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$0-2..........................................        1,271          106
2-10..........................................        1,897          204
10-50.........................................        1,742          124
50+...........................................          990           65
                                               --------------
  Total.......................................        5,900          499
------------------------------------------------------------------------

    Should the interest rate charged on loans be subject to a 15 
percent ceiling, a number of federal credit unions, where the majority 
of members are low-income, will incur significant financial strain. 
Approximately 15 percent of federal credit unions with low-income 
designation report loan interest rates greater than 15 percent. In 
contrast, only 8.5 percent of all credit unions report rates above 15 
percent. Approximately 17 percent of low-income credit unions with 
assets less than $10 million would be affected.
    These credit unions offset the cost of generating low-balance loans 
by charging increased interest rates. These credit unions generally are 
not able to provide credit card loans and, instead, grant closed-ended 
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 
requiring higher personnel costs and related operational expenses, and 
lack economies of scale.
    Further, among the 499 federal credit unions where the most common 
rate is more than 15 percent for unsecured loans, 83 have 20 percent or 
more of their assets in this category and all but three credit unions 
have assets of less than $10 million. For these credit unions, lowering 
the rates would threaten their liquidity, capital, earnings, and 
growth.
    The Board has concluded that conditions exist to retain the federal 
credit union interest rate ceiling of 18 percent per year for the 
period September 8, 2003 through March 8, 2005. Loans and line of 
credit balances existing on or before March 8, 2005 may continue to 
bear interest at their contractual rate, not to exceed 18 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 before the 
September 9, 2003 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 ten million 
dollars in assets). This final rule provides added flexibility to all 
federal credit

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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.

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 July 31, 
2003.
Becky Baker,
Secretary to the Board.


0
Accordingly, NCUA amends 12 CFR chapter VII as follows:

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

0
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.


0
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, 2005, 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 March 8, 2005.
* * * * *

[FR Doc. 03-19988 Filed 8-5-03; 8:45 am]
BILLING CODE 7535-01-P