House Democrats spar over rate cap bill

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WASHINGTON — The debate in Congress over interest rate caps is highlighting cracks within the Democratic Party, as moderate members are holding up a bill to extend Military Lending Act provisions to all consumers.

Since House Democrats took control of the chamber after the 2018 elections, the Financial Services Committee has emphasized reining in predatory lending. But a bill introduced by Rep. Jesús “Chuy” Garcia, D-Ill., has moderate Democrats pumping the breaks.

The bill extends the same 36% cap on loans to service members under the MLA to all consumers. In anticipation of the House Financial Services Committee considering Garcia’s bill, House Financial Services Committee Chairwoman Maxine Waters, D-Calif., held a briefing with committee Democrats on Tuesday, according to a letter obtained by American Banker.

But the bill won’t be considered in the committee’s markup scheduled for Dec. 10, a member of Garcia’s staff said. And a financial services lobbyist familiar with the discussions told American Banker that Waters’ was met with opposition to the legislation from moderate members of her party over concerns it will cut off access to credit in several of their districts.

“There was more widespread concern about the impact of the rate cap on consumers’ access to credit than the chairwoman anticipated,” the lobbyist said.

Opponents of the legislation say the impact of a national interest rate cap hasn’t been studied properly, and would potentially cut off a wide swath of short term, small-dollar financial products.

Mary Jackson, CEO of the Online Lenders Alliance, which represents installment lenders, said because the proposed cap is based on an annualized 36% rate, the bill would have the effect of capping interest rates on one-month loans at 3%.

“The bill would wipe out all the new competitive products that are competing with more of the payday loans,” Jackson said. “I just feel like the committee should stop and study before they really understand the impacts that this would have on redlining more than 100 million Americans out of credit.”

The financial services lobbyist added that many of the short-term loans that the legislation would prohibit appear harmless to the average American.

“The bill would prohibit loan terms that appear very reasonable to most people, such as a $250 loan repayable in a month with $10 of interest,” the lobbyist said.

Yet some consumer advocates say a national interest rate cap would follow the success of similar rate caps instituted at the state level.

“There are many states where this is already the law,” said Rebecca Borné, senior policy counsel at the Center for Responsible Lending. “We don’t hear consumers in those states clamoring for higher rates."

Meanwhile, a rate-cap law soon to take effect in California has sparked a debate over whether firms could skirt such laws by partnering with out-of-state banks. Federal Deposit Insurance Corp. Chairman Jelena McWilliams said at a recent congressional hearing that her agency will not allow banks to “evade the law.”

Still, Federal Reserve Vice Chairman of Supervision Randal Quarles admitted to lawmakers that the Fed hasn’t “studied quantitatively” the potential impact of a national interest rate cap on access to credit.

And McWilliams cautioned “there would be a significant portion of small-dollar borrowers that would be excluded from the ability to get access to credit” if such a national rate cap were enacted.

A number of proposals have been introduced to set national interest rate caps on certain financial products, including a bill sponsored by Rep. Alexandria Ocasio-Cortez, D-N.Y., and Sen. Bernie Sanders, I-Vt., that would cap credit card interest rates at 15%. Garcia's bill, meanwhile, was accompanied by a Senate version proposed by Democrats on the Banking Committee.

But the impasse over Garcia’s 36% rate cap suggests Democrats are divided on how to rein in risky lending.

“The 36% rate cap bill is a priority of the progressive left and in this case it appears the chairwoman had some difficulty with more moderate members of her financial services roster,” the financial services lobbyist said.

The interest-rate debate demonstrates the challenge for Waters to balance priorities of progressive lawmakers such as Ocasio-Cortez with those of Democratic moderates.

In the case of the interest rate cap bill, it’s the moderates who are keeping Waters from advancing the measure she planned to consider in front of the full committee. Democrats currently have a 34-26 majority on the panel, which means only four Democrats would need to defect in order to kill the bill.

“Chairwoman Waters has a difficult task on her hand,” the financial services lobbyist said. “On the one hand, Rep. Ocasio-Cortez has a bill establishing a 15% rate cap. … On the other hand she has many members with significant nonprime populations in their districts who are genuinely concerned about access to credit.”

But consumer advocates are continuing to push the legislation.

“Keeping the market limited to responsible products allows responsible products to thrive,” Borné said.

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