Will the U.S. ever enact a national interest rate cap?
WASHINGTON — The vast majority of states have some kind of interest rate cap on consumer loans. But when it comes to setting a national rate cap, Congress seems to want no part of it.
The lack of legislative progress on a national level can be attributed to several factors. For one thing, unlike other consumer protection issues, the rate cap issue seems to divide even Democrats, with key lawmakers in the party opposed to the idea.
Meanwhile, consumer advocates say financial services firms have aggressively — and successfully — lobbied to fight rate cap legislation. Despite various proposals, a national usury law just seems off the table.
“It’s certainly frustrating that members of Congress don’t see that capping an interest rate is an important thing to do to make sure that loans aren’t unaffordable for people,” said Linda Jun, senior policy counsel at Americans for Financial Reform.
The two primary proposals circulating on Capitol Hill include a 36% cap — introduced by Jesús “Chuy” Garcia, D-Ill. — on annual percentage rates for consumer loans, which would extend the preexisting limit on loans for military service members to all consumers. The other more extreme proposal, floated by Rep. Alexandria Ocasio-Cortez, D-N.Y., and Sen. Bernie Sanders, I-Vt., would cap loan rates at 15%.
But the industry's argument that such legislation would cut off access to credit, particularly for lower-income consumers, so far has resonated not only with Republicans but also with a handful of key Democrats in the House.
“The primary practical dynamic is credit access. … Any bill that is tagged as curtailing credit availability will fail headwinds in Congress,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading. “What proponents have to do is make the argument that the individual receiving credit will benefit.”
In contrast, some type of APR cap at the state level is the norm. A recent report by the National Consumer Law Center tracked various types of state-enacted APR limits that apply to nonbank loans. For a $500, six-month installment loan, the report found that 45 states and the District of Columbia have rate caps, with a median limit of 38.5% APR.
The law center's report said a $2,000, two-year loan would be subject to a cap in 42 states and the District of Columbia, with a median of 31% and most of those states imposing a cap of 36% or less.
But at a recent House Financial Services Committee hearing, Democrats including Reps. David Scott, D-Ga., Brad Sherman, D-Calif., and Gregory Meeks, D-N.Y., raised concerns about capping the APRs on consumer loans at the national level.
A financial services lobbyist familiar with House discussions said a bill focusing just on a rate cap is likely to be a nonstarter.
“A rifle-shot legislative approach that features only a rate cap is likely too rigid a proxy for consumer protection,” the lobbyist said, adding that Democratic lawmakers don’t necessarily agree on what the right rate cap would be.
“Remember that AOC has a bill out there to cap APR at 15%, so a move to increase the 36% would likely further alienate progressives who believe 36% is too high already," the lobbyist said, referring to Ocasio-Cortez.
But calls for a national rate cap from progressive members have picked up in response to proposals by the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. that dealt with loans sold across state lines. The agencies clarified that when a national bank sells a loan, the same interest rate can survive to both ends of the transaction.
Those proposals were intended to help banks avoid fallout from the Madden v. Midland Funding court decision, which had restricted lenders' ability to sell off loans. But consumer groups have warned that the regulatory proposals would enable so-called rent-a-bank schemes by unregulated nonbanks in order to skirt borrower protections and state rate caps.
“With the rise of these rent-a-bank schemes … these lenders are always trying to get around these varying state laws,” Jun of Americans for Financial Reform said.
The hearing last month was the first of two planned by House Financial Services Committee Chairwoman Maxine Waters, D-Calif., focusing on rent-a-bank schemes and proposed interest rate caps.
If a national interest rate cap were implemented, rent-a-bank models wouldn’t be necessary, some say.
“One of the reasons why we have rent-a-bank arrangements is so that lenders can use the banks’ interest rates and export it to states where there are usury caps,” Boltansky said. “If you have national rate caps, the utility of a rent-a-charter model evaporates.”
Despite the push from consumer groups, industry representatives warn that capping all consumer loans at 36% would impede the ability of low-income borrowers to access credit.
“Although we can understand why some people think it’s inappropriate for there to be higher interest rates, we also know that there will be a lot of people who will lose access to credit when you put a cap like that on interest rates,” said Jeffrey Naimon, a partner at Buckley LLP. “We don’t have any other mechanism in our society for these borrowers to handle the financial circumstances that cause them to seek higher-priced credit.”
Industry representatives also make the common argument that a cap focused on annualized rates distorts the costs of short-term loans.
For example, a $20 charge on a two-week, $400 loan would amount to a 120% APR, well above the 36% cap in the legislation proposed by Garcia and supported by Waters.
Mary Jackson, chief executive of the Online Lenders Alliance, which represents fintech installment lenders, said it would be more appropriate for Congress to consider legislating around finance charges other than interest rates, or focus on the monthly charge instead of the annual rate.
“Consumers can be misled by any kind of APR calculation, so we would recommend you look at a monthly charge,” Jackson said. "Thirty-six percent is 3% a month.”
But Jun said that consumers still struggle to repay loans with a high APR in the short term.
“The people who are trying to get that loan are not going to come up with that money. … Meanwhile, their credit is getting ruined,” Jun said.
Lauren Saunders, associate director at the National Consumer Law Center, said that the APR calculation gives consumers a better understanding of the full cost of a loan.
“The APR allows people to compare apples to apples,” Saunders said. “It’s a common metric so they can compare the cost of borrowing for the same amount over the same period of time. Payday lenders like to talk about the two-week cost and they like to hide the fact that people can’t afford to pay loans in two weeks and they roll it over and over.”
Still, the industry says that cutting off consumer loans with interest rates higher than 36% won’t cut off the demand for short-term, small-dollar loans.
“I understand and sympathize with what they are seeking, but I think there are reasons why people seek higher-priced credit and there’s no other viable mechanism for people to get this money in our society today,” Naimon said.
The lobbyist said that there could be other tools for policymakers to prevent high-interest-rate loans from trapping consumers in debt.
“There are several other facets of consumer lending that more accurately predict whether a loan given to a particular consumer would be predatory, for example: ability to repay, or the likelihood that the loan will be rolled over at the end of the term, or the quality or quantity of consumer debt for that consumer,” the lobbyist said. “A principles-based approach would allow regulators the flexibility to consider more factors as they seek to balance access to credit and a prohibition on predatory loans.”
Rep. Katie Porter, D-Calif., told American Banker that “exorbitant interest rates can become predatory,” but that one of the problems with setting a cap on interest rates are changes in the marketplace.
For one thing, the direction of benchmark interest rates set by the Federal Reserve is unpredictable.
"I know some of my colleagues have raised this point and want to have that as part of the conversation,” Porter said.
Online lenders say they hope to testify to the House Financial Services Committee to make their case directly against a 36% rate cap.
Jared Kaplan, the chief executive of OppLoans, said the company has had ongoing discussions with the committee about testifying on the issue.
“The overall theme of the conversations is that we need more regulation, but it should be in the form of principles and guidelines rather than arbitrary caps,” Kaplan said. “I have been impressed and rather encouraged by conversations on the Hill. … If we can create more legislation that ensures products are structured the right way and customers are able to repay rather than an arbitrary rate cap … that would be much, much better.”