Senate Democrats want to cap loan interest rates at 36%


Senate Democrats are pushing hard for new legislation that would prevent consumers from paying sky-high interest rates on small loans, with APR of over 600% in some cases.

In order to prevent consumers from finding themselves in the pitfalls of payday loan debt where they roll over small loans again and again — paying more fees over time than the original loan amount — Senate Democrats reintroduced legislation that would cap consumer loan interest rates at 36%.

The bill, nicknamed the Fair Credit Act for Veterans and Consumersbuilds on the Military Loans Act enacted in 2006, extending the 36% interest rate cap to all consumer loans, including payday loans and installment loans.

“Now is the time for this committee to lead the country again, passing federal legislation establishing a 36% interest rate cap on all consumer loans,” said Sen. Sherrod Brown (D-Ohio ). said during a hearing on Thursday.

Although the 36% rate cap would apply to most consumer credit products, Senate Democrats took particular aim at payday loans during Wednesday’s hearing, calling them predatory.

In states where these small dollar loans are available, consumers can start borrowing with just ID and a bank account, with no collateral needed. Again experts say lead time is short repaying these loans can make them expensive and very difficult to repay.

About 18 states and Washington, D.C. currently impose a 36% rate cap on payday loan interest rates and fees, with Hawaii, Illinoisand Nebraska all have recently implemented restrictions, according to the responsible credit center.

And while several CEOs of major banks have recently said they were open to a 36% rate cap, many in the financial industry spoke out on Thursday to oppose the legislation. Some of those who oppose the bill have argued that it would reduce consumers’ access to credit, especially those in black and low-income communities, because lenders simply cannot afford to lend to this rate.

According to Banking Policy Institute. The Institute also argued that APRs are a poor way to characterize the fees and charges associated with small loans. A $500 loan with a three-month term typically costs borrowers about $55 in interest and fees. The APR stands at 44%. But if a lender charges $35 for a smaller loan of $100 taken out for the same period, that equates to an APR of 140%.

“This legislation would be a disaster for American consumers, especially those who use, demand and depend on short-term, small-dollar credit products,” said Andrew Duke, executive director of the Online Lenders Alliance, in a statement. . In one recent investigation, OLA found that 31% of all adults, including 50% of black adults, have been denied credit when they needed it.

Other opponents have also questioned the actual effectiveness of the legislation underlying the Military Loans Act, noting that there isn’t a ton of data on how it would play out in the population. general.

“The military represents a small percentage of the population,” said Bill Himpler, CEO of the American Financial Services Association. Himpler urged the committee to provide Department of Defense data on the impact of the Military Loans Act on service members and their families.

“We can’t go from a small segment of the population without data to the entire financial services system – you’re playing with fire,” Himpler added.

But there is evidence that a 36% rate cap could work, and some big banks have already adopted compliant policies. Bank of Americafor example, rolled out a low-value loan product called Help with balance last fall. This program allows existing customers to borrow up to $500, in $100 increments, for a flat fee of $5. The APR on the product ranges from 5.99% to 29.76%, depending on the amount borrowed, and customers have three months to repay the loan in installments.

US banking offers Simple loan to verify customers, allowing them to borrow up to $1,000 for a three-month period, repaying the loan in monthly installments. A loan of $400 under this program would incur a fee of $24, making 35.65% APR.

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