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This paper uses a model in which prepayment rates on large pools of mortgages are a function of the differential between the prevailing market rate for mortgages and the contract rate at which the mortgages were originally issued. The empirical part of the paper shows a significant inverse relationship between the interest-rate differential and prepayment rates. The relationship is most elastic whenever the current market rate for mortgages is between one and three percent below the contract rate of the pool. For a given interest-rate differential, the estimated prepayment rate generally decreases and the elasticity increases as the contract rate rises.

This study measures the impact of the Federal credit union usury ceiling on consumer credit availability and loan rates. When binding, the ceiling keeps loan rates low, but it reduces credit union lending. There is also evidence that a binding loan rate ceiling affects the competitiveness of credit unions in the market for deposits. Although the Federal Credit Union Act specifically mandates federally chartered credit unions to be a source of low cost consumer credit and to promote thriftiness, it is not at all clear that the intent of the Act is served by a binding usury ceiling. WHILE THERE HAVE BEEN many theoretical and empirical studies concerned withthe economics of usury laws [1,7,8,9,11,12,18,20], to date no one has focused on the impact such laws have on credit unions (CUs). Empirical research which included CUs has been inconclusive [15, 17], although studies concerning other financial institutions indicate that the existence of effective usury ceilings leads to: (i) reduced credit availability, especially for higher risk groups; (ii) increased rejection rates of loan applicants; (iii) reduced loan losses; and (iv) more stringent nonprice loan terms (e.g., shorter maturities, lower loan-to-value ratios, and higher minimum loan amounts).Yet, the credit union industry provides an excellent opportunity to study the effects of usury ceilings. Prior to 31 March 1980, federally chartered credit unions (FCUs) were prohibited by Congressional legislation from charging more than twelve percent per annum effective interest on any loan, including any service charges or loan origination fees. On the other hand, state chartered credit unions (SCUs) were subject to usury ceilings set by state authorities.1 In several states, SCUs could charge higher interest rates than FCUs.2