[Federal Register Volume 70, Number 17 (Thursday, January 27, 2005)]
[Rules and Regulations]
[Pages 3861-3863]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-1166]


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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 March 9, 2005, 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 9, 2005 through September 8, 2006. The Board is 
prepared to reconsider the 18 percent ceiling at any time should 
changes in economic conditions warrant.

DATES: Effective February 28, 2005.

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

    As Table 1 below shows, interest rates on United States Treasury 
securities

[[Page 3862]]

have increased in maturities of three years and less, in the six month 
period June 1, 2004 through November 30, 2004.

               Table 1.--Change in U.S. Government Yields
                    [May 30, 2004-November 30, 2004]
------------------------------------------------------------------------
                                   Rate  5/30/  Rate  11/30/
             Maturity                  2004         2004        Change
                                    (percent)    (percent)    (percent)
------------------------------------------------------------------------
3-month..........................         1.06         2.22         1.16
6-month..........................         1.38         2.43         1.05
2-year...........................         2.53         3.00          .47
3-year...........................         3.06         3.25          .19
5-year...........................         3.79         3.69         -.10
10-year..........................         4.65         4.35         -.30
------------------------------------------------------------------------

    In addition, between June 2004 and November 30, 2004, the Board of 
Governors of the Federal Reserve System raised the federal funds target 
rate four times, from 1.00 percent to 2.00 percent. In December 2004, 
the Federal Reserve raised the federal funds target rate another .25 
percent. Statements from Federal Reserve officials indicate that 
further increases in the federal funds target rate are expected. For 
example, Anthony M. Santomero, President of the Federal Reserve Bank of 
Philadelphia, said, ``I think it is fair to say a neutral federal funds 
policy is above our current level.'' Michael H. Moskow, President of 
the Federal Reserve Bank of Chicago, said, ``There is certainly more 
ground to cover on interest rates.''
    The forward Treasury curve (Table 2) also anticipates higher rates. 
The expected increases range from 87 basis points in the 1-year 
maturity to 34 basis points in the 10-year maturity.

                 Table 2.--Implied 1-Year Forward Rates
                           [November 30, 2004]
------------------------------------------------------------------------
                                                        Change one-year
                       Maturity                           forward rate
                                                           (percent)
------------------------------------------------------------------------
1-year...............................................                .87
2-year...............................................                .57
3-year...............................................                .52
5-year...............................................                .64
10-year..............................................                .34
------------------------------------------------------------------------

Financial Implications for Credit Unions

    For at least 450 federal credit unions, representing 7.79% percent 
of reporting federal credit unions, the most common rate on unsecured 
loans was above 15 percent at year-end 2003. 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 450 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 3 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 3.--Active Federal Credit Unions With Most Common Unsecured Loan
                      Rates Greater Than 15 Percent
                             [December 2003]
------------------------------------------------------------------------
                                                       Number of Federal
                                    Total all Federal    credit unions
     Peer group by asset size         credit unions    with greater than
                                                           15 percent
------------------------------------------------------------------------
$0-2 million......................               1175                 92
$2-10 million.....................               1794                164
$10-50 million....................               1753                123
$50 million+......................               1051                 71
                                   --------------------
    Total.........................               5773                450
------------------------------------------------------------------------

    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 12.65 percent of federal credit unions with low-income 
designation report loan interest rates greater than 15 percent. In 
contrast, only 7.79 percent of all credit unions report rates above 15 
percent. Approximately 14.33 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

[[Page 3863]]

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 450 federal credit unions where the most common 
rate is more than 15 percent for unsecured loans, 62 credit unions have 
20 percent or more of their assets in this category and all but five 
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 March 9, 2005 through September 8, 2006. 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 March 9, 
2005 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 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 January 13, 
2005.
Mary F. Rupp,
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 September 8, 2006, 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, 2006.
* * * * *
[FR Doc. 05-1166 Filed 1-26-05; 8:45 am]
BILLING CODE 7535-01-P