Maybe we focus on interest rate caps for predatory lenders, not credit unions
By Sarah Snell Cooke
“The wrong group, banks and credit unions, is being regulated.”
At its April Board Meeting, the NCUA was briefed on the federal credit union interest rate loan cap, set at 18% in January as clearly permitted under the statute.
It’s interesting to note that in the NCUA briefing package, staff pointed out that the rate was raised to 15% (plus NCUA wiggle room, hence the current 18% cap, given certain circumstances) through legislation in 1980, another time period when interest rates soared. The prime lending rate reached 15.26% that year, well above the present 7.75%.
In fact, according to the NCUA, the FCU interest rate cap was up to 21% in 1980. It remained there through May of 1987 until it was lowered back to 18% where it has remained since with an exception made for Payday Alternative Loans at 28%.
The NCUA highlighted that allowing the rate to lower back to 15% would cause significant safety and soundness issues for federal credit unions with a high concentration of higher rate loans, primarily those serving low-income and community development areas. Nearly 75% of federal credit unions with loan rates greater than 15% have either Low Income or Minority Depository Institution designations or are certified as Community Development Financial Institutions.
NCUA Board Member & Trade Association Commentary
“Adjusting the maximum loan rate higher would place additional burdens on credit union member budgets already stressed thin by inflation and tighter credit conditions,” NCUA Chairman Todd M. Harper said. “The credit union system’s statutory mission is to support the saving and credit needs of all Americans, especially people of modest means, so that is yet another reason why the maximum interest rate on loans should not be raised at this time.”
Vice Chairman Kyle Hauptman concurred that there wasn’t sufficient evidence that the FCU interest rate cap should be raised at this time. He also further said, “At this time, I do not believe there is a way we can do a floating rate ceiling that would satisfy stakeholders. It’s one of those situations where a majority of people would agree that another method might be superior, but that same majority will not be able to agree on exactly what that method is.”
Meanwhile, Board Member Rodney Hood called for the rate to be increased to 21% in January and again in April during the follow-up briefing. He added, “In today’s briefing, we learned that a variable rate is indeed a reasonable legal interpretation of the Act. After we discussed this matter at our January meeting, we received additional documents from the National Archives that showed that our General Counsel opined in the 1980s that a variable rate was a reasonable legal interpretation, however, at the time, the staff recommended “the Board not use the floating or indexed interest ceiling rate,” I presume from the operational considerations of implementing a floating ceiling in the 1980s.
“While we can all agree data processing has improved significantly since the 1980s, which would make a variable rate easier to implement, I remained concerned that a variable rate could be complicated for smaller credit unions to implement and may cause operational problems with the Truth in Lending Act, among other consumer protection laws.”
Nevertheless, the credit union trade associations pushed for such changes to no avail. CUNA asked the rate be increased to 21% or the agency establish a floating rate based on the prime rate.
Taking a similar stance, NAFCU wrote to the NCUA back in January that, “It is imperative that FCUs remain competitive and able to offer their communities a responsible, in-community alternative to loans and lines of credit pushed by profit-hungry, often predatory lenders. To do that, FCUs must be able to fairly serve their communities with the full suite of financial services products and services consumers need and demand. No individual or small business should be forced to seek desperately needed credit on patently unfair terms from big banks, fintech lenders, and unscrupulous, poorly regulated short-term-only lenders. However, this is the real-world effect of the 18 percent rate.”
The impact on low-income and community development credit unions
The experts at CU Strategic Planning, a leading consultancy for community development credit unions, shared the unique and creative programs its clients offer and the impact of the lending cap for federal credit unions, as well as what some of the state-chartered credit unions are restricted to.
Wise use of credit is integral for wealth building and severely restricts credit unions’ ability to lend, especially in the current market. This is when CU Strategic Planning Co-Owner/CFO Sharon Hall really let loose. Watch the video for our full discussion, but here’s a couple highlights. ->
“The wrong group, banks and credit unions, is being regulated. What needs regulation is the predatory lenders. Online predatory lending is out of control, and Buy-Here, Pay-Here dealerships are not capped. Instead, they’re capping the good guys…” she stated. “The regulators don’t consider what credit unions are up against…If the market in our area can bear something more than 18%, credit unions need to be allowed to do that.”
Shirley Senn, co-owner/chief social impact officer, agreed. “Look at a lot of the state-chartered credit unions, those states take into consideration some of the unique circumstances in those geographical reasons.”
She continued, “When it comes to setting the rates, credit unions have gotten smarter and have better tools and more sophisticated analytics that we can really take a look at a much deeper picture of a borrower than just a credit score. When credit unions are embracing risk-based lending, it gives them an opportunity to use what we can character-based lending.” Senn explained that credit unions are increasingly taking into account rent payments and other “forms of lending” that traditionally are not taken into account at credit bureaus.
These comments, in addition to all that Sharon and Shirley share in the video, go demonstrate that credit unions are not just less expensive banks, but they go the extra mile – often plural miles and literally – to serve Americans who’ve been abandoned by other traditional banking institutions: Americans in perpetual poverty who also live in a cancer corridor or survivors of domestic abuse, who very frequently have also suffered financial abuse and more. Seriously, watch the video if you need a reminder of why we all love working in and around credit unions.
SHOW NOTES
0:00 Sarah Snell Cooke introduces the show and Shirley Senn and Sharon Hall queue up CU Strategic Planning and their roles
5:25 The CDFI journey and combating predatory lenders
9:11 Our guests' favorite CDFI credit union programs
11:57 Sharon stands firm that community development work can actually improve credit unions' financial position
17:33 The lending cap and its impact on credit and wealth building in community development areas
21:24 State charter lending cap restrictions and improved data analytics for better understanding borrower creditworthiness
24:53 Consequences of lending caps
28:43 Credit unions are more than just cheaper alternatives to banks
31:48 Final thoughts from Sharon and Shirley