According to an NPR report published last week, a group of lawmakers consisting of three Democratic Senators, one Democratic House member, and one Republican House member is expected to introduce House and Senate versions of the “Veterans and Consumers Fair Credit Act,” a bill that would effectively establish a 36% rate cap for consumer loans. The bill, which has not yet been released, reportedly would extend the Military Lending Act’s 36% rate cap for consumer loans and ban on mandatory arbitration to all covered loans.
The American Financial Services Association (AFSA) has reported that, as a result of its advocacy efforts, the bill will not be among those considered by the House Financial Services Committee at a markup scheduled for this week. Those efforts include an op-ed published in Military Times last week written by Bill Himpler, AFSA’s President and CEO, regarding the unintended consequences that the bill could have for consumers. Mr. Himpler noted that a study by Financial Health Network found that a loan must be made for an amount of at least $2,600 for a lender to break-even at a 36% APR. He observed that because most consumers are looking to borrow much less and lenders are unable to make such smaller loans at a 36% APR given the regulatory costs imposed to service such a loan, rate caps have the unintended consequence of placing greater pressure on consumers to borrow more than they need. This results in higher finance charges, longer repayment periods, and higher overall costs for consumers, despite having a lower interest rate. He warned that many responsible lenders may no longer be able to offer small-dollar loans, pushing consumers to predatory lenders.
Most observers believe passage of the bill by this Congress is unlikely. However, Isaac Boltansky of Compass Point has commented that even if proponents of national rate cap legislation are unlikely to prevail, should Democrats win the White House in 2020, the issue could lead to heightened scrutiny of bank partnership arrangements to the extent they are viewed as an effort to avoid state rate caps.
