ABA, associations: National rate cap would harm consumers

Proposed legislation to implement a national 36% annual cap on fees and interest charged on consumer loans would make it more difficult for many consumers to obtain credit, thereby harming the very consumers the bill seeks to protect, the American Bankers Association and eight financial sector associations said today.

S.B. 3549 was introduced last week by Sen. Jack Reed (D-R.I.)  to “rein in” predatory payday lenders and other loan product providers who use abusive lending practices to target servicemembers, according to the senator’s office. However, in a letter to Reed, the associations said the bill as written would extend far beyond payday lenders to cover affordable small-dollar loans that financial institutions are being encouraged to offer, along with credit cards, personal loans and overdraft lines of credit. “As a result, many consumers who currently rely on credit cards or personal loans would be forced to turn elsewhere for short-term financing needs, including pawn shops or worse—loan sharks, unregulated online lenders and the black market,” the groups said.

A 36% annual percentage rate cap will mean financial institutions will be unable to profitably offer affordable small-dollar loans to consumers, the associations said. They pointed to Illinois, which instituted a 36% all-in rate cap in 2021, resulting in a 38% decrease in the number of loans to subprime borrowers, and a 35% increase in the average loan size to those borrowers. A rate cap instituted in Oregon in 2007 led to similar results.

“We urge opposition to this fee and interest rate cap proposal 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 products for short-term financing needs. This fee and interest rate cap would also discourage development of innovative products, especially those designed for the underserved market,” the groups said.

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