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NAFCU President and CEO Dan Berger encouraged the NCUA Board to consider the potential benefits of increasing the interest rate ceiling before it expires Sept. 10. Absent an increase, he added, the NCUA should keep the rate at its current 18 percent as well as explore a floating interest rate ceiling.

Berger, in a letter to NCUA Board Chairman J. Mark McWatters and Board Member Rick Metsger yesterday, wrote that lowering the interest rate "will be detrimental to the safety and soundness of credit unions as it could potentially result in a loss of capital." He added that a lowered interest rate could also discourage credit unions from "making loans or approving credit card applications for higher risk members."

The NAFCU president reminded the NCUA Board that the agency has flexibility in establishing the interest ceiling on loans. The Federal Credit Union Act sets a cap of 15 percent but permits NCUA's board to make adjustments based on certain criteria. "[T]he NCUA Board may increase the rate – or in the alternative, maintain the rate above 15 percent – if it determines interest rates have risen over the preceding six month period and that the prevailing interest rate would threaten the safety and soundness of individual credit unions," Berger wrote.

He also pointed out the impact on credit unions if the ceiling dropped to 15 percent: "67.6 percent of all federal credit unions would be required to change their rate policy, which might discourage many of them from making these kinds of loans going forward."

Berger also encouraged the NCUA to explore options to modify the interest rate ceiling away from a fixed rate to a "15 percent spread over Prime" or "floating" interest rate ceiling. He explained that under this model using today's rates, "the ceiling would be set at 19.75 percent and it would automatically adjust with the level of Prime." He added that this approach would also help credit unions reduce their interest rate risk and would "likely lead to an overall increase in lending and expand access to credit."

He told the NCUA Board that a floating interest rate will allow federal credit unions to lend to members who fall within the "subprime" or "near-prime" consumer segments at a higher rate. "Although FCUs have worked within the bounds of the current interest rate ceiling to lend to members who pose heightened credit risks, a floating cap would permit greater flexibility while still taking into account the riskiness of the borrower," Berger explained.

He suggested this be a potential topic for a future board meeting.