Lawmakers revive effort to enact national interest rate cap

Congressional Democrats are pushing a new round of legislation aimed at combating the impact of high-cost loans on consumers and small businesses.

But the new bills — including proposals to institute a national 36% interest rate cap and impose new disclosure requirements on small-business lenders — face a tough climb, with Republicans able to block any bill in the Senate and lawmakers still busy with other legislative priorities.

The bills include a proposal to impose a rate cap on all consumer loans that is similar to the federal usury limit for military servicemembers put in place in 2006. A similar effort failed in 2020 when a rate cap bill divided Democrats on the House Financial Services Committee.

But supporters hope for more traction this time around after state legislatures passed rate cap measures on a bipartisan measure, and Congress has recently shown an interest in consumer protection in various COVID-19 bills. Both the Coronavirus Aid, Relief, and Economic Security Act and the American Rescue Plan Act had bipartisan support.

Rep. Glenn Grothman, R-Wis., left, reintroduced the Veterans and Consumers Fair Credit Act along with Rep. Jesús “Chuy” Garcia, D-Ill., and 14 co-sponsors. Meanwhile, Rep. Nydia M. Velázquez, D-N.Y., right, has sponsored the Small Business Lending Disclosure Act.

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“This kind of legislation that is aimed at providing safeguards and relief to people who are really financially struggling feels in line with some of the things Congress has done recently,” said Rebecca Borne, a senior policy counsel at the Center for Responsible Lending, a consumer advocacy group.

Consumer, civil rights and religious groups have been pushing for years for a federal usury limit to rein in high-cost loans.

On Monday, Rep. Glenn Grothman, R-Wis., reintroduced the Veterans and Consumers Fair Credit Act with Rep. Jesús “Chuy” Garcia, D-Ill., and 14 co-sponsors. The bill would extend the Military Lending Act’s 36% annual percentage rate cap on payday, high-cost installment, car title loans and credit cards to all consumers. The MLA’s rate cap currently applies only to service members and their families but not to veterans or surviving spouses.

The Senate Banking Committee held a hearing in July on a companion bill co-sponsored by Chairman Sherrod Brown, D-Ohio, and Sens. Jack Reed, D-R.I., Jeff Merkley, D-Ore., Chris Van Hollen, D-Md. Both bills were first introduced in late 2019.

Meanwhile, on Thursday, Rep. Nydia M. Velázquez, D-N.Y., chairwoman of the House Small Business Committee, and Sen. Robert Menendez, D-N.J., introduced the Small Business Lending Disclosure Act. Along with a companion Senate bill, it would subject small-business lenders to the Truth in Lending Act, which requires disclosure of key lending terms such as the annual percentage rate on a loan. It also would give the Consumer Financial Protection Bureau authority to police small business lenders.

However, while House passage of either proposals is a possibility, analysts doubt they could garner the 10 Republican votes needed in the Senate even if they receive full Democratic support. Meanwhile, Congress is still preoccupied with trying to pass President Biden’s Build Back Better social spending package.

But the legislative campaign to establish a rate cap and small-business lending disclosures could still put a spotlight on certain predatory lending practices.

“Even though I think these bills are not going to be enacted, we should still expect there to be a considerable amount of pressure on high-cost lenders,” said Isaac Boltansky, managing director and director of policy research at BTIG, an institutional trading and research firm. “I think these bills should be viewed primarily as messaging documents that will provide some degree of political cover for state-level actions and regulatory action, which will be a headwind for high-cost lenders.”

The rate cap legislation comes more than a year after the Consumer Financial Protection Bureau under the Trump administration gutted a payday lending rule that would have imposed limits on small-dollar lenders.

In 2015, Congress broadened the Military Lending Act to include credit cards, installment loans and overdraft lines of credit in the 36% rate cap for service members. When it was first enacted in 2006, the MLA initially applied to a narrow range of payday, auto title and tax refund anticipation loans.

Experts say that lenders have been able to comply with the MLA changes. Some lenders have voluntarily limited the maximum annual percentage rate charged on personal loans to no more than 36%, including costs and fees.

“Because the Military Lending Act had done so well and because implementation was so easy, with no complaints from industry and the protections were so strong, we said why can’t we extend this to everyone,” said Paul E. Kantwill, the founding executive director of the Rule of Law Institute at Loyola University Chicago School of Law.

Kantwill, a former CFPB assistant director of the Office of Servicemember Affairs, helped draft the rate-cap legislation with Christopher Peterson, a law professor at the University of Utah S.J. Quinney College of Law and former CFPB special advisor.

Consumer groups claim that imposing a federal rate cap has broad public support at the state level and from some business groups including the American Fintech Council.

In Nebraska last year, 83% of voters approved a ballot initiative limiting annual rates on payday loans to 36%. Illinois Gov. J.B. Pritzker signed a bill in March capping rates at 36%.

So far, 18 states and the District of Columbia have imposed restrictions on payday loans, according to U.S. PIRG, the federation of state Public Interest Research Groups. And 45 states have set rate caps on some types of installment loans, according to the National Consumer Law Center.

But Republicans and industry representatives have long argued that imposing broad restrictions on loan pricing would hurt consumers by restricting access to credit.

Some also argue that high interest rates do not necessarily translate into high costs. For example, a $200 payday loan that must be repaid in two weeks carries a 520% annualized rate but the consumer may be willing to pay $40 for the quick cash.

“Americans should be able to make their own decisions about credit matters,” said Tom Miller, a finance professor at Mississippi State University and senior research fellow at Consumers’ Research, an independent nonprofit group. “If there is still demand for loans to cover some basic living expenses, but no available loans, what will low-income consumers do?”

Supporters of the legislation that would require price disclosures on small business loans also claim bipartisan support at the state level, noting that Republican lawmakers are keen to promote fair and competitive markets.

“The purpose of this bill is to empower small businesses to shop around,” said Louis Caditz-Peck, director of public policy at LendingClub, a San Francisco online lender. “It will also create market incentives to lower the cost of credit because lenders will have to compete on price.”

California passed legislation in 2018 that imposed disclosure requirements, similar to those under the federal Truth in Lending Act, on commercial-purpose loans of $500,000 or less. The disclosures generally include the total cost of the financing expressed both as a dollar amount and an annualized rate. New York passed similar legislation last year and similar bills are pending in Connecticut, Maryland, New Jersey and North Carolina.

Research by the Federal Reserve has found that small businesses are not given the information they need to compare loan pricing and that some commonly-used pricing metrics are misleading.

However, Republicans may be unwilling to give the CFPB additional authority to police small-business lenders due to their general antipathy toward the agency, some said.

But lawmakers may be willing to subject small-business loans to more scrutiny primarily because many loans are secured by real property, such as a home, that put businesses owners at financial risk.

One group supporting the legislation, the Responsible Business Lending Coalition, which includes fintechs and community groups, estimates that the legislation will save nearly a million small-business owners roughly $4.7 billion a year.

Boltansky said both proposals are aimed at generating headlines to show Democrats are trying to aid consumers and small businesses and influence state-level actions. He also expects more pressure from regulators on banks that partner with nonbank lenders.

“We should expect more hearings and more press and more public statements because these are issues that Democrats care about,” Boltansky said.

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