Lawmakers reinvigorate efforts to enact national interest rate cap
Congressional Democrats are pushing a new round of legislation aimed at addressing the impact of high-cost loans on consumers and small businesses.
But the new bills — including proposals to institute a national interest rate cap of 36% and impose new disclosure requirements on small business lenders — face a tough climb, with Republicans in contention. able to stall any bill in the Senate and lawmakers still busy with other legislative priorities. .
The bills include a proposal to impose a rate cap on all consumer loans that is similar to the federal usury limit for military service members put in place in 2006. A similar effort failed in 2020 when a rate cap bill divided Democrats on the House Financial Services Committee.
But supporters are hoping for more traction this time around after state legislatures passed rate caps on a bipartisan measure, and the Coronavirus Aid, Relief and Economic Security Act received a bipartisan support.
“This type of legislation that is intended to provide safeguards and relief to people who are in real financial difficulty is consistent with some of the things Congress has done recently,” said Rebecca Borne, senior policy adviser at the Center for Responsible Lending, a consumer advocacy group.
Consumers, civil rights and religious groups have been pushing for years for a federal usury limit to curb high-cost lending.
On Monday, Rep. Glenn Grothman, R-Wis., reintroduced the Fair Credit Act for Veterans and Consumers with Rep. Jesús “Chuy” Garcia, D-Ill., and 14 co-sponsors. The bill would extend the Military Loans Act’s 36% annual percentage rate cap on payday payments, high-cost payments, car title loans and credit cards to all consumers. The MLA rate cap currently applies only to military members and their families, but not to veterans or surviving spouses.
The Senate Banking Committee held an audience in July on a companion bill co-sponsored by President Sherrod Brown, D-Ohio, and the Senses. Jack Reed, DR.I., Jeff Merkley, D-Ore., Chris Van Hollen, D-Md. Both bills were first introduced in late 2019.
Meanwhile, on Thursday, Rep. Nydia M. Velázquez, DN.Y., chair of the House Small Business Committee, and Sen. Robert Menendez, DN.J., introduced the Small Business Loans Disclosure Act. businesses. Along with a companion Senate bill, it would subject small business lenders to the Truth in Lending Act, which requires disclosure of key loan terms such as the annual percentage rate on a loan. It would also give the Consumer Financial Protection Bureau the power to monitor small business lenders.
However, while House passage of either proposal is a possibility, analysts doubt they can garner the necessary 10 Republican votes in the Senate, even if they receive full Democratic support. Meanwhile, Congress is still concerned about passing President Biden’s Build Back Better social spending agenda.
But the legislative campaign to establish a rate cap and disclosure on small business loans could still shine a light on some predatory lending practices.
“While I believe these bills will not pass into law, we should still expect that there will be considerable pressure on high-cost lenders,” said Isaac Boltansky, CEO and Director of Research. on policies at BTIG, an institutional trading firm. and research firm. “I think these bills should be viewed primarily as courier documents that will provide some degree of political cover for state-level actions and regulatory action, which will be a headwind for cost lenders. raised.”
The rate cap legislation comes more than a year after the CFPB under the Trump administration emptied a payday loan rule this would have imposed limits on small lenders.
In 2015, Congress expanded the Military Loans Act to include credit cards, installment loans, and overdraft lines of credit in the 36% cap for military personnel. When first enacted in 2006, the MLA initially applied to a narrow range of payday loans, auto titles and tax refund anticipation.
Experts say lenders have been able to comply with the MLA changes. Some lenders have voluntarily limited the annual percentage rate of charge applied to personal loans to a maximum of 36%, including fees and commissions.
“Because the Military Loans Act had worked so well and because it was so easy to implement with no complaints from industry and the protections were so strong, we said why can’t we extend this to everyone,” said Paul E. Kantwill, the founder. Executive Director of the Rule of Law Institute at Loyola University Chicago School of Law.
Kantwill, a former CFPB deputy director of the Office of Military Member Affairs, helped draft the rate cap legislation with University of Utah SJ Quinney College of Law professor and former adviser Christopher Peterson. special from the CFPB.
Consumer groups say imposing a federal price cap has broad public support at the state level and from some business groups, including the American Fintech Council.
In Nebraska last year, 83% of voters approved a ballot initiative limiting annual payday loan rates to 36%. Illinois Governor JB Pritzker sign a bill in March capping rates at 36%.
So far, 18 states and the District of Columbia have imposed restrictions on payday loans, according to US PIRG, the federation of state public interest research groups. And 45 states have set price caps on certain types installment loans, according to the National Consumer Law Center.
But Republicans and industry officials have long argued that imposing broad restrictions on loan pricing would hurt consumers by restricting access to credit.
Some also argue that high interest rates do not necessarily translate into high costs. For example, a $200 payday loan that must be repaid in two weeks carries an annualized rate of 520%, but the consumer may be willing to pay $40 for the cash quickly.
“Americans should be able to make their own credit decisions,” said Tom Miller, professor of finance at Mississippi State University and senior fellow at Consumers’ Research, an independent nonprofit group. “If there is still a demand for loans to cover some basic living expenses, but no loans are available, what will low-income consumers do?”
Supporters of legislation that would require the disclosure of small business loan prices are also calling for bipartisan support at the state level, noting that Republican lawmakers are keen to promote fair and competitive markets.
“The whole point of this bill is to allow small businesses to shop around,” said Louis Caditz-Peck, director of public policy at LendingClub, an online lender in San Francisco. “It will also create incentives in the market to lower the cost of credit, as lenders will have to compete on price.”
California passed a law in 2018 that imposed disclosure requirements, similar to those in the federal Truth in Lending Act, on business loans of $500,000 or less. Disclosures generally include the total cost of financing expressed in both dollar amounts and annualized rates. New York passed similar legislation last year, and similar bills are pending in Connecticut, Maryland, New Jersey and North Carolina.
Research by the Federal Reserve found that small businesses aren’t getting the information they need to compare loan prices and that some commonly used pricing measures are misleading.
However, Republicans may not want to give the CFPB additional powers to police small business lenders, given their general antipathy toward the agency, some said.
But lawmakers may be willing to subject small business loans to greater scrutiny, primarily because many loans are secured by real property, such as a home, which puts business owners at financial risk.
A group supporting the legislation, the Responsible Business Lending Coalition, which includes fintechs and community groups, estimates that the legislation will save nearly one million small business owners around $4.7 billion a year.
Boltansky said both proposals were meant to grab headlines to show that Democrats are trying to help consumers and small businesses and influence actions at the state level. He also expects additional pressure from regulators on banks that partner with non-bank lenders.
“We should expect more hearings, more press and more public statements, because these are issues that Democrats care about,” Boltansky said.