The National Credit Union Administration (NCUA) this week authorized federal credit unions to offer variable-rate consumer loans and adjustable-rate mortgages. The regulations are now in effect.
Although fixed-rate loans are expected to still be available at a price, many borrowers seeking to finance a new car or a new house will find that their payments go up or down according to prevailing rates. The change follows the trend toward deregulation of the financial industry and is intended to aid credit cunions to withstand what NCUA chairman Lawrence Connell recently termed "severe financial situations."
Under the new rules, a credit union may adjust the interest rates and payments as often as it wishes on a consumer loan. It is presumed -- but not required -- that changes will be made in accordance with an index of the lender's choice. The onlu restriction on the choice is that the index not be tied to a factor under the credit union's control, such as its cost of funds, and that it be "easily ascertainable" by the borrower.
NCUA did not suggest any particular index, although presumably the Consumer Price Index could be used. However, it warned credit unions that if they do adjust rates without an index they may be risking a lawsuit by the borrower. Terms must be explicitly stated in the loan contract.
Balloon payments -- where the borrower pays only interest on the note and then a large final payment -- will also be permitted, although NCUA again warned credit unions that rising interest rates could increase the possibility of default. The maximum length of consumer loans is 12 years, except for mobile homes, which is 15 years.
The regulation is intended to override state alws against variable consumer loans. Another NCUA regulation already permits federal credit unions to charge up to 21 percent interest on loans, even in states where the usury ceiling is lower. Conversely, 21 percent is the maximum in states with higher ceilings.
Credit unions have made very few home mortgages since they were authorized to do so three years ago because increasing interest rates made it imprudent to offer fixed-rate loans. Now NCUA has accorded credit unions virtually the same powers that banks and sayings and loan associations recently received to issue adjustable rate mortgages. These shift the burden of inflation from lender to borrower.
The regulations issued yesterday are even more liberal than those promulgated for banks and thrifts. There are no federally imposed limitations on the amount the interest rate or the monthly payment can go up or down, but credit unions are free to set them. Rates and payments can be changed as often as once a month if the lender wishes, but must be adjusted at least every five years.