NCUA Board Action Bulletin: Board Extends 18 Percent Interest Rate Cap

ALEXANDRIA, Va. – The National Credit Union Administration Board held its second open meeting of 2017 at the agency’s headquarters Thursday and unanimously approved a staff recommendation to maintain the current 18% maximum loan interest rate for most loans made by federal credit unions until Sept. 10, 2018.

The Board also received a briefing from the Chief Financial Officer on the performance of the National Credit Union Share Insurance Fund, which ended 2016 with a net position of $12.7 billion.

Loan Rate Ceiling Extended Through Sept. 2018
After reviewing trends in money-market rates and current conditions among federal credit unions, the NCUA Board voted unanimously to extend the current interest rate cap of 18% on most federal credit union loans through Sept. 10, 2018.

“A reduction in the interest rate cap would directly affect borrowers of modest means, as they are often the members served by credit unions participating in risk-based lending," Acting NCUA Board Chairman J. Mark McWatters said. "It is important that we ensure that credit unions can continue to provide access to affordable credit to best serve their members.”

The Federal Credit Union Act caps the interest rate on federal credit union loans at 15%; however, the law gives the NCUA Board discretion to raise that limit for 18-month periods if interest-rate levels could threaten the safety and soundness of credit unions. The current 18% ceiling has remained in place since May 1987. The 18% cap applies to all federal credit union lending except originations made under NCUA’s consumer-friendly Payday Alternative Loan program, which are capped at 28%.

An NCUA staff analysis found that money market rates have risen in the preceding six-month period and that lowering the interest rate could have an adverse effect on the safety and soundness of credit unions.

At the end of the third quarter of 2016, more than 65% of federal credit unions were offering loan products that would be affected by a reduction in the interest-rate ceiling. A reduction in the loan rate cap could reduce loan volume at those credit unions, impair earnings and place additional pressure on net interest income.

Consumers could feel the effects, as well. A reduction in the interest rate ceiling could limit access to credit for low-income members. As of the end of the third quarter of 2016, 56% of federal credit unions held the low-income designation, meaning a majority of their members earn 80% or less of median family income in the areas in which they live.

The Board will continue to monitor market rates and credit union financial conditions to determine whether a change should be made to the maximum loan rate. The Board may take action sooner than 18 months if circumstances warrant.

Details of the staff analysis are available online here.

Share Insurance Fund Remained Stable in 2016
The Share Insurance Fund ended 2016 in a stable position due to consistent trends in income and operating expenses.

The fund’s net position was $12.7 billion at the end of 2016.

The Share Insurance Fund ended 2016 with a 1.24% equity ratio. NCUA calculated the ratio on an insured share base of $1 trillion, a 7% increase from the previous year’s insured base of $961.3 billion. When the Share Insurance Fund bills for the one percent capital deposit adjustment in March, the equity ratio is projected to increase to 1.27%.

The amount of assets in CAMEL codes 3, 4 and 5 credit unions has decreased 52.2% since peaking at $205.6 billion in September 2010. Year over year, the Chief Financial Officer reported:

  • The number of CAMEL codes 4 and 5 credit unions declined 10.9% to 196 at the end of 2016, down from 220 at the end of 2015.
  • Assets in CAMEL codes 4 and 5 credit unions increased 12.8% to $9.7 billion at the end of 2016, up from $8.6 billion at the end of 2015.
  • The number of CAMEL code 3 credit unions declined 10.9% to 1,123 at the end of 2016, down from 1,261 at the end of 2015.
  • Assets in CAMEL code 3 credit unions declined 1.3% to $88.5 billion at the end of 2016, down from $89.7 billion at the end of 2015.

There were 14 involuntary liquidations and assisted mergers during 2016, compared to 16 credit union failures in 2015. Total losses associated with failures in 2016 was $8.6 million, a decrease from $14.8 million the previous year. Fraud was a contributing factor in 10 of these failures, at a cost of $6.5 million during 2016, compared to 11 of 16 failures in 2015 at a cost of $12.3 million.

The Chief Financial Officer also reported the Share Insurance Fund and the agency’s three other permanent funds—the Operating Fund, the Central Liquidity Facility and the Community Development Revolving Loan Fund—each received an unmodified, or “clean,” audit opinion from the agency’s independent auditor with no reportable conditions for 2016.

in Compliance & Regulatory News