NCUA Discusses Options for Interest Rate Ceiling

Dale Baker, NAFCU Regulatory Affairs Counsel

The Federal Reserve has been steadily raising interest rates in an effort to cool inflation, and those increases have compressed credit unions’ net interest margins, particularly on credit cards, lines of credit and other unsecured loans to members. At its January 2023 meeting, the NCUA Board extended the current 18% interest rate ceiling for 18 months and instructed the NCUA Office of General Counsel (OGC) to determine whether a floating interest rate ceiling is permissible under the Federal Credit Union (FCU) Act. NAFCU has consistently advocated for the NCUA to adopt a floating interest rate ceiling.

While not all credit unions offer credit cards, there has been an uptick in requests from members as consumer credit usage increases. The 18% interest rate ceiling applies only to FCUs. Banks and fintechs, which are not subject to NCUA regulation, typically offer credit cards, lines of credit and other unsecured loans with average rates well over 18%, often approaching 30%.

The concern about the interest rate ceiling is two-fold. As a credit union makes a risk-based judgment before issuing a credit card to a member, is 18% enough to cover repayment risks as well as the credit union’s rising cost of borrowing money? Also, in terms of expanding access to credit and doing the right thing for members, wouldn’t members that otherwise have to turn to comparatively expensive bank products be better off if their credit unions could offer a fairer rate?

At the NCUA Board’s April meeting, the NCUA OGC shared that it had determined, based on its review of the FCU Act, its legislative history, relevant case law and other federal agencies’ actions, that it is reasonable to interpret the FCU Act to permit a floating interest rate ceiling if the required agency coordination and economic conditions are met. NCUA staff also shared how a return to the FCU Act’s 15% interest rate ceiling would affect credit unions. Staff research showed that 33 FCUs have a concentration of loans above 15% exceeding 10% of assets. Of those 33 credit unions, 25 have less than $10 million in assets.

The entire NCUA Board agreed that allowing the interest rate ceiling to revert to 15% would create hardships for a significant number of credit unions, but only Board Member Rodney Hood supported adopting a floating interest rate ceiling or, in the interim, raising the interest rate ceiling to 21%.

Vice Chairman Kyle Hauptman pointed out that while a floating interest rate ceiling generally makes sense, it would place significant stress on credit unions in a future zero or near-zero interest rate environment when it could drop below the current 18% interest rate ceiling. NAFCU was disappointed by the NCUA Board’s reluctance to increase the interest rate ceiling as the association has supported increasing the interest rate ceiling to 21% given these unprecedented economic times.

Recognizing the interest rate pressures facing many credit unions, Chairman Todd Harper suggested that credit unions look for ways to reduce credit product costs, such as by offering more traditional no-reward credit card programs, in order to serve more members at the same rate.

For now, the interest rate ceiling will likely remain at 18% until at least September 2024. Although the traditional extension is for 18 months, the NCUA Board can meet, discuss and adjust the interest rate ceiling at any time, provided the FCU Act’s required agency coordination and economic conditions are met. The NCUA OGC’s research and findings provide a good foundation for future discussion, but the NCUA Board made clear that any future adoption of a floating interest rate ceiling would be a lengthy, complex process because many of the NCUA’s related regulations would need to be reviewed to ensure unintended consequences are avoided.