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Interest rates have risen from the unprecedented lows that followed the 2008 financial crisis and persisted for more than a decade. With this rise, calls have come to increase the credit union interest rate ceiling. Recent industry proposals include a 21% ceiling or a floating ceiling of 15 percentage points above the prime rate.
At Inclusiv, we see things a little differently. As a mission-driven network of community development credit unions (CDCUs), Inclusiv balances a mission of promoting the financial inclusion and well-being of low-income households with supporting the financial sustainability of our network of more than 450 CDCUs. And we vigorously oppose an increase to the 18% interest rate ceiling on both counts. Here's why:
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It's inequitable. Some claim that it will help people with damaged credit, but it's hard to see how raising the cost of capital for people who are struggling financially actually helps. People with damaged credit are the very people and households already hit the hardest by rising costs and volatility in employment. In our economy, these challenges are disproportionately borne by Black and Latino households. Typical Black and Latino workers make 20% less than white workers, experience higher rates of unemployment and have less, or no, generational wealth to fall back on to manage unexpected expenses or hard times. Moreover, the legacy of redlining has resulted in the cost of capital in Black and Latino communities being higher and access to responsible lending harder. As a result, credit scores for Black and Latino borrowers are disproportionately lower and they will face higher loan rates if the interest rate ceiling is raised. CDCUs are the fastest growing segment of the credit union industry, and they lend to people and households who have damaged credit and do so well below the 18% threshold. We're happy to educate others in our industry on how to do it.
It's unnecessary. When Congress set the 15% interest rate ceiling for credit unions in the Federal Credit Union Act, it did not envision a prime rate of 0% and a 15 percentage point spread. In fact, the current Fed Funds rate is half the peak rate experienced under the current 18% interest rate ceiling, and there are 10 percentage points between the prime rate and the interest rate ceiling. Rising rates also mark a return to investment income for credit unions, and particularly small credit unions, which in earlier times used investment income to support operations and basic member services.
It weakens the financial performance of credit unions. For CDCUs, the financial stability of their members is key to the success of the credit union. Making good loans to members who can afford to repay is how CDCUs and their members thrive. People who are not making enough money to cover their expenses likely shouldn't take on more debt, and, if they do need to borrow to make a necessary purchase, like replacing a broken-down car or to refinance high-cost, predatory loans, they need affordable rates that will help them repay the new loan successfully, not a loan with a rate of more than 18% that will sap their budget.
As just one example of responsible CDCU lending, the $149 million River City Federal Credit Union, an MDI and CDFI credit union in San Antonio, Texas, lives its commitment to equity by ensuring that its predominantly Latino membership has access to affordable loans to meet critical needs. River City recently lowered the cost of its car loans for borrowers with low credit scores and offers loans with single-digit interest rates to people with credit scores as low as 520. River City and hundreds of other CDCUs like it across the country are meeting their communities' needs and providing safe and affordable loans and financial services to people with damaged credit with rates well under the NCUA's 18% interest rate ceiling.
On the other end of the spectrum from CDCUs, payday lenders charge exorbitant prices and expect high losses as a result. Predatory lending is not a good business model and although large credit unions may be looking breathlessly at the huge profits payday lenders reap, it comes with generating higher loss rates than a typical credit union should feel comfortable with. We don't build our business by extracting fees from transactions, we build our business on member success, trust and loyalty. If a credit union cannot make a good loan to a subprime borrower under the 18% interest rate ceiling, then they need to learn how to better lend to that market, not simply charge more.
It harms our credit union difference reputation and our brand. If you look on the websites of fintechs, payday lenders and even non-profit loan funds, you often cannot find the cost of the loans. It requires multiple steps to uncover the cost of capital and often submitting a loan application before you can see how much you're paying. Federal credit unions and many state credit unions, by contrast, have a clear, transparent and consistent maximum interest rate. As a result, everyone considering a loan at a credit union knows exactly what they are getting. That certainty has built our brand and reputation as fair and transparent lenders. When that starts shifting, we all lose a big part of our credit union differentiator story. At Inclusiv, we are proud of the standard that has been set by our industry in the bigger financial landscape. When all else is becoming fragmented, overly complex and quite often shady, credit unions stand apart with clear, transparent pricing that is known far beyond the four walls of any one institution. That kind of reputation and brand is invaluable. Let's not lose it!
To quote NCUA Chairman Todd M. Harper, "the credit union system's statutory mission is to support the saving and credit needs of all Americans, especially people of modest means." Maintaining the interest rate ceiling at 18% is an important way that the NCUA can ensure credit unions live up to this mission and encourage credit unions to lend at affordable rates to all borrowers, and especially Black and Latino borrowers and other borrowers of color who must overcome systemic barriers to achieve financial well-being.
Cathie Mahon Cathie Mahon is President/CEO for Inclusiv in New York, N.Y.
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