Financial Trades: 36% Fee and Rate Cap Could Constrain Credit

A coalition of financial trade groups including ABA today urged Senate Banking Committee members to reject any legislative proposal that would impose a national fee and interest rate cap of 36%, noting that such a cap would create barriers to credit access for consumers.

“A 36% rate cap, however calculated, will mean depository institutions will be unable to profitably offer affordable small-dollar loans,” the groups said, cautioning that a reduction in small-dollar credit products from financial institutions would drive many consumers to turn elsewhere for short-term financing needs, such as pawn shops, online lenders or other unregulated financial services providers. Capping total fees and interest rates at 36% would also affect credit card customers, they added, as it would likely result in the elimination or reduction of popular and valued credit card features, like cash-back or other rewards.

“History has shown that fee and interest rate caps reduce access to credit, especially for those with no or marred credit histories. They also limit consumer choice and shrink competition,” the groups wrote. “We urge you to oppose pending fee and interest rate cap legislation because it will reduce access to credit for millions of consumers, particularly subprime borrowers who rely on affordable small-dollar loans, credit cards, and other depository institution products for short-term financing needs. Fee and interest rate caps will also discourage development of innovative products, especially those designed for the underserved market.”