CUNA requested the NCUA Board examine the current interest rate cap for federal credit union (FCU) loans, including consideration of increasing the fixed rate cap or adopting a floating rate cap in a letter sent this week. The Federal Credit Union Act provides a default interest rate limit for federal credit union loans of 15%, it also permits the NCUA Board to increase the rate cap if certain conditions are met.
The board has consistently increased the ceiling to 18% since the late 1980s, but must revisit it every 18 months, with the last increase being approved in June 2021 (meaning the board must decide on extending by March 31). CUNA urges the board to consider raising the cap beyond 18%.
“As we approach the Board’s next review of the interest rate cap, we ask the agency to be mindful of the current interest rate environment, due in large part to the severity of the Federal Reserve Board’s recent—and continuing—interest rate hikes,” the letter reads.
“Some credit unions have experienced increased liquidity risk as they strive to continue to serve borrowers with very low credit scores because they lack the ability to raise loan rates,” the letter reads. “Maintaining relatively low loan rates in the face of market interest rate increases can lead to higher loan losses and safety and soundness concerns. The alternative, avoiding the risk by turning applicants away, means some consumers are forced to shop for credit at alternative services providers with substantially higher loan rates.”
CUNA’s analysis of subprime lending data shows that in the deep subprime arena the difference between finance company and credit union average rates is over eight percentage points. This suggests that a 28% finance company rate might be closer to a 20% credit union rate at origination, a life-of-loan savings of roughly $14,500 for a consumer that finances an average-priced new car on a 72-month term.
“In addition to considering increasing the fixed-rate cap, the Board should consider adopting a floating interest rate cap instead of its traditional fixed interest rate (currently set at 18%). CUNA raised this suggestion several years ago and has since addressed it during a number of meetings with the agency,” the letter reads. “As such, the agency has had ample time to assess the specifics and appropriateness of implementing such a rate cap. For example, a floating cap could be something like the prime rate plus 15%, with a minimum of 20% and a maximum of 30%. Given the timeliness of this issue, we urge the Board to use its authority to act quickly, whether simply increasing the rate cap or adopting our suggestion of a floating cap.”