WASHINGTON — In 2006, Congress passed a bipartisan measure imposing a 36% interest rate cap on loans to members of the military. But a Democratic proposal to extend that cap to all consumer loans has a much steeper climb.
The usury limit plan
Senate Banking Committee Chairman Sherrod Brown, D-Ohio, said at a hearing Thursday that 36% rate limits enacted in a
“We've seen supermajorities of voters in state after state … that support the 36% rate cap," he said. "It's clear the public wants these protections in very different kinds of states."
But Republicans and industry representatives warn that such a broad restriction on loan pricing will hamper financial institutions' ability to account for credit risk.
“The 36% rate cap leaves banks unable to adequately price for risk in order to viably offer affordable short-term credit,” said David Pommerehn, senior vice president and general counsel at the Consumer Bankers Association, who testified before the panel.
The lead sponsor for the bill is Sen. Jack Reed, D-R.I. It is co-sponsored by Brown and Sens. Chris Van Hollen, D-Md., and Jeff Merkley, D-Ore.
Republicans also homed in on the annual percentage rate calculations that the legislation requires lenders to calculate as being too restrictive. Sen. Pat Toomey, R-Pa., the committee’s ranking member, noted that a $15 fee imposed on a $100 loan to be paid back over three months, would be calculated as a 60% annual percentage rate.
“This is a real product that a major American bank offers,” Toomey said. “But it appears that would be illegal under the proposed 36% APR rate cap.”
A 36% rate cap on consumer loans drew attention in 2006 when a former Republican senator, Jim Talent of Missouri, co-sponsored the limit on credit products for military service members. It was included as an amendment in a defense authorization bill signed by President George W. Bush.
Yet even Sen. Jon Tester, a Democrat from Montana, said he was concerned that Reed's proposed legislation would severely restrict tribal lending businesses, such as Plain Green Loans, which is owned by the Chippewa Cree Tribe in Montana.
“Plain Green Loans … gives good jobs, good paying jobs, to a place that has about 80% unemployment, by the way, and invests in youth programs, does a lot of really good work,” said Tester. “The way this bill is written, it could eventually have very negative impacts on them.”
Reed argued that the legislation is necessary to protect consumers from “debt traps” that can result from expensive credit products, such as payday loans.
“We've discussed and alluded to the issue of the debt traps that people are caught in,” Reed said. “According to data that I see from the Consumer Financial Protection Bureau, 80% of payday loans are rolled over, which is essentially suggesting that it may be the business plan of these companies to get a situation and client who they know even beforehand won't be able to … pay.”
Still, industry representatives and Republicans on the panel fear that financial institutions won’t be able to offer short-term, small-dollar products that consumers demand.
Sen. Jerry Moran, R-Kan., described the interest rate cap proposal as a “Washington-knows-best, one-size-fits-all interest rate cap that could not be more inconsistent with states’ rights and federalism.”
Pommerehn said an “all-in” APR calculation would potentially prevent banks from offering popular rewards credit cards.
“Any card that imposes a fee of any sort, which most reward cards do, has the potential [of] violating an all-in APR, such as ... [the calculation] in the Military Lending Act,” said Pommerehn. “Card issuers would certainly hesitate to offer them.”
Still, Brown said he was unconvinced by arguments suggesting that consumers would have fewer credit options if the legislation is enacted.
“We know the tired arguments against the bill — they’re the same ones we heard about the Military Lending Act,” said Brown. “The payday industry claimed we would cut off access to credit to service members. That didn’t happen.”
Sen. Elizabeth Warren, D-Mass., even suggested that a 36% interest rate cap could extend beyond consumer loans to all small-business loans.
“We need to keep fighting to protect consumers from predatory lending,” said Warren. “But we can't leave out small businesses and simply leave them at the mercy of anyone who wants to scam them. That's why we need to take a close look at the gaps that exist in protections for small-business owners and consider solutions like extending consumer credit protections to small- business loans.”
