When developing policy, it makes sense to listen to those who are likely to be most affected. Yet attempts to impose a 36% annual interest rate cap on small, short-term loans are guided by outside interest groups with little regard for the consequences or financial realities of many Americans. Policymakers should look at the story and think about the impact of their proposals on those who use these loans, rather than being guided by those who have no experience with the product.
Consumer financial service providers serve tens of millions of Americans each year, providing access to a wide range of credit products and financial services that customers appreciate, including short-term and small-value loans. Regulating the annual percentage rate (APR) of these loans, which often have a term of two to four weeks, is misguided, as the APR is a measure of annual interest and therefore only makes sense for loans. longer term of a year or more.
In addition, efforts to impose a 36% annual interest rate cap on these types of loans will restrict access to legal and responsible lenders, while doing nothing to meet their underlying need or to protect them. ‘tackle the very real problem of unlicensed, illegal or unscrupulous lenders trying to take advantage of consumers. In fact, such poorly worded proposals could have the unintended consequence of forcing millions of people to seek dangerous alternatives from these unregulated lenders.
History has proven that arbitrary price caps just don’t work. Dozens of financial institutions have tried to introduce cheaper substitutes for short-term, low-value loans, only to eliminate the products from their portfolios. The Federal Deposit Insurance Corporation (FDIC) also experimented with a 36% interest rate cap, but the loans just weren’t profitable enough for banks to continue to offer the product.
South Dakota provides another recent example, adopting a tariff cap in 2016. A National Financial Capability Study conducted by the Financial Industry Regulatory Authority (FINRA) found that more South Dakotas reported having overdue medical bills and paying only the minimum on their credit cards in 2018 until 2015, before entry in force of the tariff cap.
Industry critics recently paid for a investigation to show that a majority of voters support a 36 percent rate cap. Although the survey methodology has already been demystified, it should also be noted that a 2016 survey carried out by Global Strategy Group and the Tarrance Group, who surveyed both voters and borrowers, found that voters often had misconceptions about low-value short-term loans that did not match the reality reported by borrowers. Virtually all borrowers – 96% – said they fully understood the terms of the loan, including interest rates and fees, before taking out the loan. Eighty percent of borrowers said the current loan requirements are sufficient, while less than half of voters agree. Borrowers were also twice as likely as voters to believe these loans are fairly priced for the value they offer. Surveying individuals on annual interest rate caps when they have no experience with short-term loans and small dollars is reckless at best and dishonest at worst.
Ironically, investigating those who disregard the people who actually use short-term, low-value loans reflects the approach taken by the Consumer Financial Protection Bureau (CFPB) in crafting its rules under the guidance of former manager Richard Cordray. More … than 1 million customers have filed comments opposing the CFPB rule, including 400,000 handwritten letters telling their personal stories of how these products have helped them. Yet instead of considering the impact on customers, the CFPB proceeded with a rule that was developed behind closed doors alongside the same advocacy groups and special interests now pushing misguided rate caps. We hope that, under the current leadership of Director Kathy Kraninger, the voices of borrowers will be considered as the Bureau moves forward in enacting consumer protections.
Policymakers should work to ensure that all Americans have access to legal and authorized sources of credit in their communities. If they listen to the real experience of borrowers, it will become clear that an annual cap on interest rates on all consumer loans will only restrict access to short-term and low-value loans and will remove a vital source of credit for those who appreciate and use these products to meet their unique financial needs.
DeVault is the chairman of Community Financial Services Association of America, which represents the low-value short-term loan industry.