On Wednesday, heads of major US banks expressed tentative support for federal interest rates on consumer loans, which are likely to include payday loans and car loans.
During Hearings Wednesday by the Senate Banking, Housing and Urban Affairs CommitteeSenator Jack Reid, M.D., asked CEOs of Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Wells Fargo if they would support the 36% interest rate cap on consumer loans such as payday loans.
Bank executives did not immediately abandon the idea. “We absolutely do not charge such high interest rates to our clients,” Citi CEO Jane Fraser said in response to Senator Reed’s question. She added that Citi would like to review the law just to make sure it doesn’t have unintended consequences. “But we appreciate the spirit of it and the intention behind it,” she said.
The CEOs of Chase, Goldman and Wells Fargo agreed that they would like to see any final legislation, but all have expressed their openness to the idea.
David Solomon, CEO of Goldman Sachs, said he wanted to make sure that “a substantially different interest rate environment” didn’t get in the way. “But in principle, we believe that such transparency is good, and to watch it carefully,” he said.
Brian Moynihan, CEO of Bank of America, said he also understands the “spirit” of the law.
Currently, 18 states, as well as Washington, D.C., set a 36% cap on interest rates and commissions on payday loans, according to data Responsible Lending Center… But Senator Reid, along with Senator Sherrod Brown, D.C., previously introduced legislation in 2019 this would create a federal consumer credit interest rate cap of 36%. Senator Brown told Reuters earlier this week that he plans to reintroduce the bill…
In states where payday lending is allowed, borrowers can usually obtain one of these loans by logging into the lender and providing only valid ID, proof of income, and bank account. Unlike a mortgage or car loan, no physical collateral is usually required, and the loan amount is usually repayable after two weeks.
However, the high interest rates that are coming more than 600% per annum in some statesand the short repayment terms can make these loans expensive and difficult to repay. Research carried out The Consumer Financial Protection Bureau found that nearly one in four payday loans are re-borrowed nine or more times. In addition, it takes borrowers about five months to pay off loans and costs them an average of $ 520 in finance. Pew Charitable Trusts Reports…
Large banks are not entirely impartial about small dollar loans. While banks generally do not lend small dollars, this is changing. In 2018 The Office of the Comptroller of the Currency Gives Banks the Green Light start small dollar lending programs. Meanwhile, many payday lenders argue that a 36% rate cap could put them out of business, potentially giving banks an edge. If payday lenders go out of business due to the federal rate cap, it could force consumers to use banks offering these loans.
In May 2020, the Federal Reserve released “Principles of lending” for banks to offer responsible small loans. Several banks have already joined the business, including Bank of America. The other banks on the panel have not yet submitted any petty dollar loan options.
Last fall, Bank of America introduced a new small dollar loan product called Balance aidallowing existing clients to borrow up to $ 500 in $ 100 increments for a flat fee of $ 5. The annual interest rate on the product ranges from 5.99% to 29.76%, depending on the loan amount, and customers have three months to repay the loan in installments.
One of the reasons Bank of American created the Balance Assist product, Moynihan said on Wednesday, was to help clients avoid paying creditors before payday.
While defenders argue that caping interest rates on payday loans protects consumers from getting overwhelmed with these traditionally expensive loans, opponents argue that such laws will restrict access to credit, forcing lenders to stop doing business with volatile rates. leaving people to turn nowhere when they are short on cash.
Recent research suggests consumers can be better served by rules that require lenders to deny borrowers any new loans for a 30-day period after they have taken out three consecutive payday loans, rather than setting a cap on interest rates.