A group of seven leading financial groups voiced their collective opposition to a proposal that would impose an interest rate cap of 36 percent on consumer loans.
The proposal, by Sen. Jack Reed (D-RI), would be an amendment to the Military Construction, Veterans Affairs, and Related Agencies Appropriations Act, 2024. Senate Amendment 1285 would put an interest rate cap of 36 percent on consumer loans.
The groups, in a letter to Reed, said it would reduce access to credit for consumers. The groups said a cap on fees and interest would affect small dollar loans, credit cards, and other products offered within the well-regulated banking system.
“Small dollar loans, credit cards, and other forms of short-term credit are critical for helping consumers meet emergency expenses, disruptions in pay, and misalignments in the timing of their expenses and income. The proposed 36 percent fee and interest cap would make it more difficult for many consumers to obtain credit, thereby harming the very consumers the legislation seeks to protect,” the groups wrote to Reed and cosponsor Sen. Jeff Merkley (D-OR).
The letter was signed by the Consumer Bankers Association, American Financial Services Association, Bank Policy Institute, Independent Community Bankers of America, Association of Military Banks of America, American Bankers Association, and Mid-Sized Bank Coalition of America.
“Many consumers who currently rely on credit cards or personal loans would be forced to turn elsewhere for short-term financing needs, including pawn shops, or worse– loan sharks, unregulated online lenders, and the black market. […] The available evidence confirms that fee and interest rate caps reduce access to credit, especially for those with no or troubled credit history,” they added.
More banks now offer more small dollar loans as a safety net option than ever before, Further, they added that the introduction of the rate cap would threaten to eliminate credit card rewards and cash back features.
“[While] some larger banks have introduced small dollar products, the application of artificially low APR limits to small dollar products would preclude many from being able to establish available small dollar products to meet consumer needs. [A] cap will also inhibit innovative credit cards with non-credit features designed to attract underserved groups because even a nominal annual fee will result in an all-in rate that exceeds 36 percent,” they continued.
In addition, they said a narrow focus on annual percentage rates is not always an appropriate measure of the cost of credit, especially when considering factors such as one-time annual fees or short-term products.
“We urge opposition to this fee and interest rate cap proposal because it will reduce access to credit for millions of consumers, particularly subprime borrowers who rely on affordable small dollar loans, credit cards, and other products for short term financing needs,” the groups concluded.