Why House Democrats are at odds over rate cap bill

WASHINGTON — A House hearing Wednesday made public a lingering split among Democrats over a bill that would cap the annual percentage rate on consumer loans at 36%.

House Financial Services Committee Chairwoman Maxine Waters, D-Calif., is pushing a bill that would extend the Military Lending Act's interest rate cap of 36% to all consumer loans. But several committee Democrats warned that the bill would cut off access to credit to minority and other borrowers who take out short-term, small-dollar loans.

“APR I don’t think is the best way to evaluate the cost of short-term loans,” said Rep. Brad Sherman, D-Calif.

Rep. David Scott, D-Ga., said he has heard from minority bankers “who are very concerned about this rate cap and their ability to provide access to credit. “ He added and that rate caps would force consumers into larger loans than they need.

Andrew Harrer/Bloomberg

“The lender must make larger loans in order to make the loan profitable,” Scott said. “This means that consumers may take up a larger loan than they need, which may place our consumers in a financially precarious position. And the rate cap extends broadly to most types of credit and is not narrowly targeted to the payday lenders.”

Last year Waters was unable to build enough support to schedule the legislation for a committee vote. Democrats were said to have raised in private the kinds of objections that they openly stated at the hearing.

Members of both parties warned Wednesday that the bill — originally introduced by Rep. Jesús “Chuy” Garcia, D-Ill. — would prohibit short-terms loans that are harmless to the average consumer.

“One of the things that concerns me is the misrepresentation of a cost of a loan,” said Rep. Blaine Luetkemeyer, R-Mo. “APR in my judgment, if you are talking about a loan that is less than one year, is irrelevant.”

He added that a $20 charge on a two-week, $400 loan would amount to a 120% APR, well above the 36% cap in Garcia’s legislation.

Democrats on the committee who support the legislation argue that triple-digit interest rates are unacceptable.

“It seems there is no lack of creativity when it comes to the financial industry's desire to exploit those facing hardship,” said Rep. Ayanna Pressley, D-Mass. “To be clear, unless you believe that poverty is a character flaw, it is absolutely no justification for triple-digit interest rate installment loans.”

The hearing also highlighted the partisan split over a proposal by regulators that would allow banks to work around a 2015 court ruling that had restricted their ability to sell off loans.

The 2nd U.S. Circuit Court of Appeals' decision in the 2015 Madden v. Midland Funding case posed new legal challenges for financial institutions transferring debts to third parties. The court ruled that a usury law in the buyer's state can apply.

But under a proposal made in November by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., when a national bank sells a loan, the initial interest rate could be preserved.

Democrats and consumers advocates have blasted the regulators’ proposal, saying it would provide legal cover to predatory rent-a-bank schemes. But Republicans lauded the regulators for providing clarity for financial institutions and enabling innovative partnerships between banks and fintech firms.

“Even if a state — like my home state of California — has passed a law setting a usury rate cap, this rule would allow lenders to ignore the law and to import high-rate, high-risk, and otherwise illegal loans back into the state,” Waters said in her opening remarks. “Low-income consumers who are already struggling will pay the price.”

And Graciela Aponte-Diaz, director of federal campaigns at the Center for Responsible Lending, during testimony urged the OCC and FDIC to withdraw their proposal to prevent bad actors from bypassing state laws.

“Both the FDIC and OCC have stated that they do not support bank partnerships designed to evade state laws,” Aponte-Diaz told committee members. “But those agencies need to back up their words with actions. Until they act, there will continue to be a small number of banks and lenders who try to dodge state laws.”

But Rep. Patrick McHenry of North Carolina, the ranking Republican on the committee, argued that banks for years before the Madden decision had followed a “valid when made” doctrine, which provides that if a loan’s interest rate is legal in the state where it was originated, that loan continues to be valid when transferred to a party in another state.

“This is a commonsense rule of contracting that has existed for over 100 years until 2015 when the 2nd Circuit Court’s Madden decision decided that no, banks cannot be sure that their loans hold any value when sold," McHenry said.