The proposed annual ceiling of 36% is difficult to sell to the GOP, banks



WASHINGTON – In 2006, Congress passed a bipartisan measure setting an interest rate cap of 36% on military loans. But the Democrats’ proposal to extend that limit to all consumer loans has seen a much steeper rise.

Usury limit plan leaked for several years on Capitol Hill, but now that Democrats control both houses of Congress and the White House, they are trying to shed more light on the idea.

Senate Banking Committee Chairman Sherrod Brown, Ohio, said at a hearing Thursday that the 36% rate cap is in place. number of states – including both voting initiatives and legislative measures – demonstrate support for a federal restriction.

“We’ve seen an overwhelming majority of voters in state after state … who support a rate cap of 36%,” he said. “It’s clear that the public wants that kind of protection in a wide variety of states.”

But Republicans and industry officials warn that such a broad restriction on loan pricing will limit financial institutions’ ability to take credit risk into account.

Eighty percent "payday loans have been rolled over, which essentially implies that the business plan of these companies might be to get the situation and a client they know even in advance will not be able to ... pay, ”said Senator Jack Reid , DR.  I.

Eighty percent of “payday loans are rolled over, which essentially suggests that the business plan for these companies might be to get the situation, and a client they know even in advance will not be able to … pay,” Senator Jack Reed said. … , D.I.

Bloomberg News

“The 36% rate cap makes it impossible for banks to adequately assess risk to actually offer affordable short-term loans,” said David Pommeren, senior vice president and general counsel for the Consumer Bankers Association, speaking before the panel.

The main sponsor of the bill is Senator Jack Reid, M.D. It is sponsored by Brown and Senator Chris Van Hollen, M.D., and Jeff Merkley, M.D.

Republicans have also focused on the calculation of the annual interest rate, which, according to the law, lenders should expect to be too strict. Senator Pat Toomey, a member of the Human Rights Committee, noted that the $ 15 fee charged on a $ 100 loan payable over three months will be calculated as a 60% annual interest rate.

“This is a real product that a major American bank is offering,” Toomey said. “But it looks like it would be illegal at the proposed maximum rate of 36% per annum.”

The 36% consumer credit cap attracted attention in 2006 when former Republican Senator Jim Talent of Missouri co-sponsored the restriction on military credit products. This was introduced as an amendment to the Defense Authorization Bill signed by President George W. Bush.

However, even Senator John Tester, a Democrat from Montana, said he was concerned that Reed’s proposed legislation would severely restrict tribal loans such as Plain Green Loans, owned by the Chippewa Cree tribe in Montana.

“Simple green loans … give good jobs, well-paid jobs in a place where, by the way, about 80% of unemployment, and invest in youth programs, do a lot of really good work,” said Tester. “The way this bill is written can ultimately have a very negative impact on them.”

Reid argued that legislation is needed to protect consumers from the “debt traps” that can arise from the use of expensive credit products such as payday loans.

“We discussed and mentioned the problem of the debt traps that people fall into,” Reed said. “According to the data I get from the Consumer Financial Protection Bureau, 80% of payday loans are rolled over, which essentially suggests that the business plan for these companies might be to get the situation and the client they know is won even in advance “not be able to … pay.”

However, industry officials and Republicans in the group fear that financial institutions will not be able to offer short-term, low-cost products that consumers demand.

Senator Jerry Moran, a Republican of Canada, described the interest rate cap proposal as “the universal, universal interest rate cap that Washington knows best, that can no longer be incompatible with state and federalism.”

Pommeren said the “all-in” annual interest rate calculation could potentially prevent banks from offering popular bonus credit cards.

“Any card that charges any kind of commission, as most bonus cards do, has the potential [of] breaking the annual all-in bet, for example … [the calculation] in the Military Credit Act, ”Pommeren said. “Card issuers will certainly hesitate to offer them.”

However, Brown said he was not convinced by the argument that consumers would have fewer credit options if the law were passed.

“We are aware of outdated arguments against the bill – the same arguments we heard about the Defense Credit Act,” Brown said. “The paycheck industry said that we would cut off access to loans for military personnel. That did not happen “.

Senator Elizabeth Warren, Massachusetts, even suggested that the 36% interest rate cap could apply not only to consumer loans, but to all small business loans.

“We must continue to fight to protect consumers from predatory lending,” Warren said. “But we can’t ignore small businesses and just leave them to their fate to anyone who wants to cheat them. That is why we need to look closely at the protection gaps for small business owners and consider solutions such as extending consumer credit protection to small business loans. ”


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