NCUA Interest Rate Cap Is Attracting Attention From All Sides

Credit union and banking trade groups weigh in, as agency board prepares for briefing.

To credit union trade groups, the 18% maximum interest rate that credit unions may charge on most consumer loans is outdated.

To banking trade groups, however, the effort to increase that cap is further evidence of mission creep—that credit unions no longer place a priority on serving people of modest means.

This high-stakes debate will come to a head on Thursday, when the NCUA board is scheduled to receive a briefing on the loan interest cap. No decision on whether to increase the rate is expected at Thursday’s meeting, according to the agenda released by the agency.

Federal law states that the interest rate cap on loans at federal credit unions is 15%, unless certain economic conditions exist. Those conditions have resulted in the agency board increasing the interest rate to 18% for most loans, and 28% for short-term loans using the NCUA’s Payday Alternative Loan (PAL) model.

The NCUA board approved maintaining the 18% interest rate in January. However, board members said they wanted to revisit the issue in April, with a briefing by agency staff.

In recent days, trade groups on both sides of the issue have made their positions clear.

Bankers' Views

The banks went first, when the Independent Community Bankers of America and its state affiliates sent a letter to the House Financial Services Committee requesting an oversight hearing for the NCUA.

The interest rate cap was among the issues that the ICBA addressed.

“The credit union industry has continually sought to obtain bank-like powers without compromising their tax exemption,” the groups wrote. “The NCUA should keep this powers expansion in check rather than abet it. Why is the agency even considering an increase to the interest rate ceiling that is fundamentally at odds with the mission of credit unions, to use their tax exemption to provide affordable products to consumers of “modest means’”?

Credit Union Views

However, Jason Stverak CUNA’s deputy chief advocacy officer for federal government affairs disagreed, in his own letter to the panel in which he attempts to refute the bankers’ claims.

He noted, for instance, that Equifax data indicates that, in 2022, finance companies originated more than 1,000, 72-month auto loans with interest rates higher than 25%.

He said that, with a higher interest rate cap, credit unions could potentially serve those consumers—saving them thousands of dollars.

He added that CUNA’s analysis of subprime lending data showed that in the deep subprime arena, the difference between the average interest rate charged by a finance company and the rate charged by credit unions exceeded eight percentage points.

He said, for example, “a 28% finance company rate might be closer to a 20% credit union rate at origination. That difference would save the consumer roughly $14,500 for an average-priced new car with a 72-month term.”

Greg Mesack, NAFCU’s senior vice president of government affairs, blasted the banking groups, in a letter to the House panel.

He said that if the credit union interest rate cap were set at 21%, it still would be lower than the average interest rate charged at banks, which currently sits at about 24.16%.

“This just demonstrates, again, the hypocrisy of community banks in calling for credit unions to have their rates capped at 18 percent when the average rate on a credit card is 33 percent above the credit union rate cap,” he wrote, adding, “Credit unions will only be able to serve more members of their communities with the flexibility to adjust their rates slightly higher, if necessary.”

What's Next?

For his part, NCUA Chairman Todd Harper said at January’s board meeting that he was inclined to oppose increasing the interest rate.

"From my perspective, adjusting the maximum loan interest rate would place additional burdens on credit union member budgets already stretched think by inflation and tighter credit conditions," he said.

At the time, board Vice Chairman Kyle Hauptman requested the agency's general counsel report back to the board on whether a floating interest rate cap would be legal.

Board member Rodney Hood also requested that study but added that he also wanted agency staff to report on whether a 21% interest rate is warranted.