36% Rate Cap Seeks to Take a Bite Out of Legalized Loan Sharks
Consumer protection legislation that would cap rates on payday and car title loans at 36% has been introduced in the House of Representatives. The bipartisan bill is a companion to similar legislation filed in the Senate in August. Current rates on payday loans can be in excess of 400% in some states.
The bipartisan House bill was introduced by Rep. Jesús “Chuy” Garcia (D-IL) and Rep. Glenn Grothman (R-WI) and is a companion to the Senate bill (S. 2508) that was introduced in August by Sens. Jack Reed (D-RI), Jeff Merkley (D-OR), Banking Committee Chairman Sherrod Brown (D-OH) and Sen. Chris Van Hollen (D-MD).
“For too long, payday and car-title lenders have been allowed to exploit the most economically vulnerable members of our communities,” said Candace Archer, payday and consumer campaigns manager for Americans for Financial Reform. “Congress is right to take the initiative to address this problem, especially as many families are struggling to recover from the economic devastation caused by the pandemic. This bill will establish nationwide safeguards to protect consumers from dangerous debt traps.”
According to the Consumer Financial Protection Bureau (CFPB) about 80 percent of borrowers have to take out another payday loan to repay the original loan, initiating a spiraling cycle often referred to as the “debt trap.” Every time a person takes out another loan, the overall amount of debt increases as interest and fees pile on. Collectively, the debt trap is draining $8 billion every year from borrowers. By prohibiting loans with an APR above 36 percent, this bill would fight the debt trap.
“This important legislation is needed now more than ever as consumers across the country try to recover from the financial ruin caused by the COVID-19 pandemic,” said Rachel Gittleman, Financial Services Outreach Manager with the Consumer Federation of America. “We thank Congressmen García and Grothman for prioritizing consumers and ensuring they are protected from predatory, high cost lenders that thrive on the unaffordable debt trap created by the borrower’s inability to repay and continual reborrowing.”
The legislation extends protections that currently exist for our nation’s servicemembers through the Military Lending Act (MLA) to veterans, Gold Star Families, unactivated reservists, and all consumers. The MLA passed in 2006 and caps the Annual Percentage Rate (APR) on loans offered to servicemembers and their families at 36 percent. The MLA has helped curb predatory lending among military members, as have rate caps in eighteen states and the District of Columbia that prevent short-term payday loans. However, the MLA fails to protect veterans or surviving family members, who have made unparalleled sacrifices for this country, and does not protect American consumers who live states that do not have any limits on the amount of interest a lender can charge.
Provisions of the bill include:
- Establishing a simple, common sense limit to stop predatory lending. Extending the MLA’s 36 percent interest rate cap would return to the kinds of state usury laws that were in force in virtually every state for most of the twentieth century.
- Preventing hidden fees and loopholes. The 36 percent rate cap is based on the Pentagon’s successful rules for the MLA that include all additional fees or add-ons in the interest calculation.
- A time tested approach. The MLA has worked to protect service members from payday abuses, and state rate caps have stopped the payday and car title debt trap for millions of people. A federal standard will help millions of additional people, and prevent evasions of existing state laws.
- Making compliance easy. Compliance costs for industry will be low because creditors already understand how to comply and have systems in place for active duty military and their families.
- Upholding stronger state protections. States like Arkansas, Illinois, South Dakota, North Carolina, New Hampshire, New York and Montana already have strong interest rate caps. The bill leaves in place any provisions of state laws that provide greater protections to consumers.
“High-cost loans are marketed as fast cash that you can apply for in minutes and walk out the door with,” said Mike Litt, consumer campaign director at U.S. PIRG. “In reality, they’re long-term debt traps, often carrying triple-digit interest rates that can cost more than two or three times the original loan amounts.