Banking Trade Groups Argue Interest Rate Cap Could Impact Subprime Borrowers’ Credit Access

Nov 28, 2023Congressional Legislation, Federal Regulation, News

In a recent joint letter to lawmakers, seven bank trade groups warned that the Military Lending Act, which would impose a 36 percent interest rate cap on consumer loans, could have ramifications beyond payday lenders, as financial institutions may become unable to offer small-dollar loans to subprime borrowers.

“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 groups wrote. “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. Congress should reject these legislative measures.”

“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 trade groups also said. 

A study by the Urban Institute showed that a similar rate cap on loans for military members did not result in better debt outcomes and credit for subprime service members. The Urban Institute suggested more effective measures like fee disclosures so borrowers can understand what they’re paying for, as well as designing loans that can be repaid in monthly installments rather than a single lump sum. 

Many have also opposed swipe fees for credit cards, as they average 2.24 percent of the purchase amount and can increase prices paid by borrowers by more than $1,000 a year for the average family, according to the National Retail Federation (NRF). 

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 the Mid-Sized Bank Coalition of America.

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