Fixed or Float - NCUA Board Briefed on Interest Rate Cap
At Thursday's NCUA Board meeting, the Board received a briefing on the Loan Interest Rate Ceiling for federal credit unions. In today's rising interest rate environment, many credit unions are finding it difficult to properly risk-based price their loan and credit card products while operating within the bounds of the fixed interest rate cap. The idea of a floating interest rate cap has been gaining momentum as a possible solution. However, as you’ll read below, the Board still has some major concerns with this approach.
What is the current cap, and what is a floating cap?
The Federal Credit Union Act caps the interest rate for FCUs at 15%. However, it does give the NCUA Board the authority to raise that cap for a period of up to 18 months if certain conditions are met. Since the late 1980s, the Board has used this authority to raise the cap to 18%, renewing it every 18 months. This past January, the Board voted to keep the cap at 18% for another 18-month period commencing March 11, 2023. At that January Board meeting, Board members agreed to revisit the issue during the April meeting as staff researched the legality of a floating interest rate ceiling and the policy issues surrounding it.
A floating cap could work similar to some variable interest rate loan products in the market today, such as a HELOC or some credit cards. There would be an index, a margin, and possibly a minimum and maximum range. For example, the maximum interest rate a federal credit union could charge could be set at the prime rate plus 15%, with a minimum of 20% and a maximum of 30%, as was suggested by CUNA in a letter to the NCUA Board prior to the January meeting (link: ). This is just one example - all of these elements could be adjusted.
What happened at today's Board meeting?
During today's briefing, NCUA legal staff stated that it is "reasonable to interpret the Federal Credit Union Act to permit a floating interest rate ceiling." This means the Board could consider it as a tool without legislative changes needed.
However, whether a floating interest rate cap is legally permissible and whether the NCUA Board members have any appetite for pursuing this approach are two very different questions. In the questions portion of today's Board meeting on this agenda item, each of the Board members shared some of their perspective on this.
Chairman Harper noted that credit unions could take other actions, such as eliminating rewards from some credit card products, as an alternative to raising interest rates. He also highlighted the administrative burden such a shift would necessitate for both the NCUA and credit unions. Finally, he questioned whether a floating or higher interest rate cap would help members and noted his hesitancy to place additional burden on families.
Vice Chairman Hauptman noted that while the concept of a floating interest rate makes economic sense, he does not believe there is a method that will satisfy a majority of stakeholders. He highlighted that while most discussions now are on how a floating rate cap would be implemented to raise the maximum interest rate to above 18%, stakeholders must also consider the opposite scenario - if rates go to zero, or negative, should the interest rate cap drop below 15% as well? He concluded that a floating rate cap is not feasible.
Board Member Hood remarked that while he does believe a floating interest rate cap is more feasible today than it has been in the past, that it would still place additional burdens on small credit unions implementing it. He noted the competitive difference between federal credit unions and state-chartered credit unions, who are not subject to the 18% cap.
While there was no vote or action taken today, it was clear each of the three NCUA Board members have, to put it lightly, reservations about the feasibility and appropriateness of a floating interest rate cap.
You can read more about today’s Board meeting and the floating rate cap issue here.
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