Divided NCUA Board Favors Keeping Loan Interest Rate Cap at 18%

Agency appears set to maintain current threshold; approves request for information on impact of climate change on credit union system.

Despite industry pressure, two of the three NCUA board members said Thursday that they are not inclined to increase the agency’s loan interest rate cap beyond the current 18%.

During their monthly meeting, board Chairman Todd Harper and Vice Chairman Kyle Hauptman said there was not sufficient evidence to justify increasing the cap, while board member Rodney Hood said he would favor a threshold of 21%.

“With American households under increasing financial stress from inflationary pressures and economic uncertainty, we should not place additional and unnecessary burdens on families,” Harper said during a staff briefing on the issue.

He added that a staff analysis concluded that lowering the interest rate would threaten the safety and soundness of the credit union system.

Further, Harper said the staff analysis also indicated that under federal law, the NCUA board could adopt a floating interest rate, but that would take time to implement and would be complicated for credit unions.

Backstory

In January, when the board approved maintaining a loan cap of 18%—and 28% for loans modeled on the agency’s Payday Loan Program—board members asked for a staff briefing on whether the cap should be increased and if a floating cap would be legal.

Credit union trade groups have been pushing the board to increase the cap or to adopt a floating cap.

Where Board Members Stand

The board was not scheduled to vote on any increase Thursday, but members still commented on their preferences.

“As I called for in January, I still believe that a 21-percent interest rate ceiling is appropriate and strikes the right balance to consider the statutory goals of thrift promotion and credit availability while being responsive to economic conditions to avoid safety and soundness considerations,” Hood said.

However, Hauptman maintained that the agency still does not have the data to support an increase in the interest rate cap.

Impact of Climate Change

The board also approved the publication of a request for information from stakeholders on the impact that climate change has on the credit union system, with Hauptman the lone vote opposing it.

An agency staff analysis released Wednesday said that one quarter of all federally insured credit unions are in communities that have a relatively high or very high risk of experiencing the negative effects of natural hazards.

In releasing the request for information, the agency stated that “climate-related physical and transition risks tend to manifest as traditional financial risks, including credit risk, liquidity risk, market risk, and operational risk.”

Harper said that the answers the agency receives “may also allow us to discern what tools credit unions would like to have to assist them in effectively monitoring, managing, and mitigating climate-related financial risks.”

The chairman added that the request for information is for informational purposes only.

“Responses to this request for information will not be used as part of the current NCUA examination and supervision program,” he said. “Moreover, my fellow board members and I fully agree if there were a subsequent change in agency policy and supervision related to climate financial risk, that change would be agreed upon by board action, similar to any other policy changes we make.”

Hood voted in favor of the plan, saying that last year, he promised Harper he would do so.

Hauptman listed several reasons for his opposition, saying that those closest to natural disasters are best equipped to make judgements about climate issues. He added that there is a history of unintended consequences when government interferes in private markets.

“I foresee a scenario where NCUA’s words might give that credit union pause about increased exposure, even indirectly, to the fossil fuel industry,” Hauptman said. “That NCUA-caused reticence could result in harm to those potential new members and to the credit union’s finances. Again, this is a hypothetical, I’m just elucidating my apprehension about what might happen in the future.”