The American Bankers Association today warned lawmakers of the potential consequences of imposing interest rate caps on consumer credit products. At a time when nonbanks are increasingly seeking to provide financial products to consumers outside of the heavily regulated banking system, ABA cautioned that overly aggressive legislative proposals to address abuses by these entities could ultimately restrict credit access, particularly for borrowers who are most likely to face credit challenges.
“Legislation to cap lending prices is not as advertised by some advocates: it is more than just ‘interest rate caps’ and would undermine basic presumptions about how consumer credit markets operate,” ABA said in a statement submitted for the record of a House Financial Services Committee hearing today. These proposals “likely would significantly reduce access to good mainstream financial products such as credit cards,” in addition to raising costs. For example, ABA highlighted new data demonstrating that if Congress were to impose an all-in rate cap equivalent to a 27% retail APR cap, it would translate to 13.8 million subprime borrowers who may lose credit access.
ABA emphasized that credit card interest rates should be determined by market forces. “Card issuers currently set credit card interest at appropriate rates given a borrower’s risk level. If issuers were required to keep rates artificially low, many consumers would lose access to credit, which myriad studies have shown has real, damaging effects on households.”
The association added that “consumers are best protected when credit products are provided through channels associated with a chartered, regular bank. . . The heavily-regulated banking industry can provide services in a manner that improves the condition of all parties.”