New business tax cuts, a new Federal Reserve chair and low inflation set the stage for interest rate hikes going into 2018. Speculation projected three hikes last year, but only two occurred. This was no surprise to industry experts who surmised a third rate hike would be unlikely because the economy was not in a position to support one. Most of the tax cuts set forth in President Trump's tax plan would not take effect until 2018, and would affect businesses more so than consumers. Plus, inflation was a market factor and growth seemed to be slower than expected.

How Much the New Tax Cuts Will Affect Rate Hikes

Well, it is now 2018 and the tax plan just went into effect. Businesses are positioning themselves to take full advantage of their tax rate plummeting from 35% to 21%. That's good news for them. It's good news for the Feds too. The potential for interest rate hikes has directly increased as a result. Toward the end of 2017 many investors thought there might be only two hikes in 2018 because of inflation. The attitude of the markets certainly seemed to be positioned that way, and who could blame them? Sluggish inflation coupled with a sluggish growth rate usually means interest rates will remain the same.

However, the last half of 2017 saw a marked change. While inflation remained somewhat flat, growth increased substantially. The fast pace of growth in juxtaposition to flat inflation means we could see a potential three-quarter run of 3% growth. The last time this happened was 2005. Add in the relief from the tax cuts and we could potentially see four rate hikes this year.

Small Rate Increases, Long-Term Impact

What does this mean? Rate hikes are likely to continue through 2019 and 2020 because the Feds have a favorable view of the economy. Opinions vary on just how many rate hikes there may be though. Some economists believe there will only be two. They cite flat inflation as the main cause, coupled with the viewpoint that most of the growth in 2018 will be due to business, rather than consumer spending. Others say there could be four rate hikes due to the strength of the economy and a bullish labor market. Interestingly enough, dot map plots by Fed chair members project more than two rate hikes in 2018.

So while the jury may be out as to the number of rate increases we can expect, the stage is set for continued upward movement. Steady growth, politics and slowly rising inflation are the perfect storm for long-term rate hikes. And though percentage hike increments may be small (quarter percent increments), they could have a substantial impact on lending long-term.

Auto and home loans will be at least slightly affected. A quarter of a percent increase on an automobile loan may not be as noticeable as on a home loan, and neither are likely to break the budget for most consumers. If anything, impending rate hikes might just push the savvy consumer to sign and close before the next increase so they can save over the lifetime of their loan. Credit card lending is another story altogether. Rate increases can affect APRs almost immediately since credit card terms are more fluid. This could have a big impact on how consumers view credit card spending.

Rate Increases and Your Forms

Regardless of lending type, each rate hike will affect your forms. If the Fed increases interest rates four times in 2018, your forms will be affected each time. And remember, the rate change does not just affect your lending forms; disclosures are also affected. They will need to be updated to reflect the new changes each time they occur. Therefore, make sure you are on top of your compliance game. One misstep with compliance could cost you thousands, or affect your charter standing if you find your credit union in a worst-case scenario event.

You really cannot fault the compliance officers though. They want to make sure consumers are not being taken advantage of or being misled with old, outdated information. No credit union purposely tries to mislead, but it can be easy to get caught up in daily operation procedures to the point that some things get missed. Forms compliance is not a ball you want to drop.

The best way to do this is use an excellent forms provider. Your provider should offer forms packages that:

Comply with all state and federal regulations;
Easily integrate with your data processor;
Are available in multiple formats;
Are custom-built to match your credit union's unique offerings;
Are properly branded to your credit union; and
Can be easily updated to “go with the flow.”

Furthermore, your provider should be available to answer any questions you may have at any moment. Rate hikes affect every type of lending form from home and auto loans to consumer credit cards. Should you have questions about a particular form change, your forms provider should be accessible. If not, maybe it's time for a change. It is 2018 after all. Resolutions are the order of the day. The Fed has made its resolution clear – to increase rates. Are your forms prepared to handle it?

Richard Gallagher is CEO of Oak Tree Business Systems, Inc. He can be reached at 800-537-9598 or clientservices@oaktreebiz.com.

Instant Insights /

2018 Brings Changes to Interest Rates and Forms

Related Stories

Recommended For You