Associations Urge Senators to Reject Nationwide Consumer Loan Rate Cap
Commentary by Steven Lofchie
Financial and trade associations urged Senate Democrats to reject proposed legislation that would impose a nationwide cap on fees and interest rates for consumer loans.
The legislation would impose a nationwide 36% "fee and interest rate" cap on consumer loans. The cap would cover not only interest charges but also nearly all related fees and costs — including application, late, overdraft, and ancillary product fees — to close loopholes that allow high-cost lending.
In the letter, the associations urged lawmakers to reject the proposed interest rate cap, warning it would limit access to affordable credit and ultimately harm the consumers it seeks to protect. The associations argued the cap would make it uneconomical for banks and credit unions to offer small-dollar loans, credit cards, and other essential products, particularly for borrowers with limited or poor credit histories. They cautioned that consumers would be pushed toward higher-cost, less-regulated lenders, noting that even modest operational costs — like $55 to originate a $500 loan — would exceed the allowable rate. The associations added that including annual fees and other charges in the rate calculation would cause many credit cards to surpass the cap, leading to tighter underwriting standards, lower credit limits, and reduced rewards.
The associations also criticized the bill’s reliance on the "military annual percentage rate" ("MAPR"). They explained that, under the MAPR formula, a credit card with an 18% interest rate and a $10 annual fee could appear as a 138% rate on a $100 balance. They called MAPR mathematically flawed and misleading because it overstates the cost of credit. They cited research from several states and the United Kingdom showing that similar caps have reduced credit access and worsened financial outcomes for consumers. The associations concluded that, while the bill aims to curb predatory lending, it would instead restrict regulated credit and discourage innovation.
Commentary
It is unfortunately the case that policies that make a show of protecting lower income consumers have the effect of making products unavailable to them. It is obvious that there is an administrative cost to making a loan, and that the administrative cost is not an entirely variable amount; there is a certain minimum cost for making any loan. If legislation makes it impossible for a bank to earn an amount equal to the sum of (i) the administrative cost of the loan, (ii) the cost of the money, and (iii) the credit risk of the loan, then banks will not make the loan.
If legislators believe that banks are making inordinate profits on small loans, they might first ask why more banks do not compete for that business.
Beyond that, it is not unreasonable to ask the regulators to conduct a study of the costs and profitability of small dollar loans. What are the administrative costs? What is the default rate and what are the default costs? Without some knowledge base on which to base any legislation (assuming that legislation is required), there is no reason to feel confident that the proposed legislation will be beneficial to the supposed protected parties.