Monday, March 27, 2017

FCU's Statutory Interest Rate Cap Is Archaic

During its February 23rd National Credit Union Administration (NCUA) Board meeting, Board Member Metsger stated that the existing interest rate cap in the Federal Credit Union Act is archaic and should be revisited by Congress.

The Federal Credit Union Act sets the maximum interest rate on loans at 15 percent in 1980. However, the NCUA Board has the discretion to raise rates above the statutory cap for periods not to exceed 18 months, if two conditions are met.

According to the transcript, "[t]he NCUA Board has raised this ceiling every 18 months ..., since exactly 1980. ... The ceiling has remained unchanged at 18 percent since May of 1987, or approximately 30 years."

Metsger furthermore stated that 40 percent of the states that do have state supervisors do not have a statutory usury cap. Among states that have a fixed rate usury cap, the statutory interest rate ranges between eight percent and 60 percent, with a median of 21 percent.

According to Metsger, NCUA should ask Congress "to either adjust the statutory ceiling to reflect the reality of the marketplace over the last four decades, or to give the Board broader authority to set the rate for longer periods of time."

Metsger concluded that the 18 percent cap is no longer the exception, but rather the norm.

Acting NCUA Chairman McWatters concurred with Board Member Metsger's statement.

However, if NCUA wants real reform, it should request that Congress repeal the statutory usury cap.

Abolishing the statutory cap will reduce some regulatory burden on federal credit unions. It would allow NCUA to eliminate two lines in the Call Report that apply to federal credit unions requiring them to report on the dollar amount of loans that exceed the 15 percent cap and the weighted average interest rate on these loans.

As an economist, I am opposed to interest rate ceilings or price controls. Price controls distort the market. It interferes with the allocation of credit and has unintended consequences of harming those individuals that the price controls are intended to help.

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