NAFCU Asks NCUA to Increase Interest Rate Ceiling

Industry advocacy group voices concern over outsized risks to credit unions in current economic climate.

The National Credit Union Administration (NCUA) should immediately increase its permissible interest rate ceiling, the National Association of Federally-Insured Credit Unions (NAFCU) said Thursday.

In a letter to the agency’s board, Ann Kossachev, NAFCU’s vice president of regulatory affairs, wrote that based on current economic conditions, the NCUA should establish a floating permissible interest rate ceiling equal to a 15% spread over prime.

“NAFCU urges the NCUA board to immediately raise the permissible interest rate ceiling to mitigate unnecessary interest rate risks posed to federal credit unions during this critical period of economic recovery and to enable all federal credit unions to more confidently endeavor to serve the underserved and unserved in their communities,” she told the agency.

What Is the NCUA’s Current Interest Rate Ceiling?

The NCUA set its current interest rate ceiling of 18% in 1987 and its board has since voted more than 20 times to maintain that number.

Federal law allows the agency to increase the interest rate as long as it consults with the appropriate congressional committees, the Treasury Department and other financial regulators; and additionally determines both that money-market interest rates have risen over the past six months, and the current interest rate threatens the safety and soundness of individual credit unions.

In her letter, Kossachev asserted that current economic conditions plainly warrant an increase from the agency, noting further federal law does not place an upper limit on the interest rate, nor specify a way to calculate the rate.

Outsized Impact on Credit Unions

Kossachev also claimed rapidly rising interest rates are causing a variety of material risks to credit unions, writing: “Few contemporary risks, if any, are as dire as the elevated and accelerating risks to federal credit unions’ earnings.”

She added federal credit unions will face even greater portfolio pressures as a result of the Federal Reserve’s aggressive effort to combat inflation, noting this will have a bigger impact on credit unions than banks.

“Federal credit unions’ earnings underpin federal credit unions’ liquidity, capital, and growth and are not, like big banks’ earnings, meted out mostly to a handful of institutional investors headquartered in a few major cities,” she wrote. “A federal credit union’s earnings, by statutory design, are reinvested in the federal credit union’s community.”

Kossachev closed by saying if the NCUA does not wish to adjust interest rates in the manner suggested by NAFCU, the board should extend the current interest rate for the maximum allowable period of 18 months no fewer than 90 days before it is set to expire on March 10, 2023.