Democrats in Congress are pushing for a new set of laws to tackle the impact of high-cost loans on consumers and small businesses.
But the new bills – including proposals to institute a national 36% interest rate cap and impose new disclosure requirements on small business lenders – face a tough climb, with Republicans able to block. any bill in the Senate and legislators still busy with other legislative priorities. .
The bills include a proposal to put a rate cap on all consumer loans that is similar to the federal usury limit for the military put in place in 2006. A similar effort failed in 2020 when a rate cap bill divided Democrats on the House financial services committee. .
But supporters are hoping for more traction this time around after state legislatures passed rate cap measures on a bipartisan measure, and Congress recently showed interest in protecting consumers in various COVID-related bills. 19. The Coronavirus Aid, Relief, and Economic Security Act and the American Rescue Plan Act had bipartisan support.
“This type of legislation that aims to provide assurances and relief to people who are genuinely in financial difficulty seems in line with some of the things that Congress has done recently,” said Rebecca Borne, senior policy adviser at the Center for Responsible Lending, a consumer advocacy group.
Consumers, civil rights and religious groups have been pushing for a federal usury limit for years to curb high-cost loans.
On Monday, Representative Glenn Grothman, R-Wis., Reintroduced the Fair Credit for Veterans and Consumers Act with Representative Jesús “Chuy” Garcia, D-Ill., And 14 co-sponsors. The bill would extend the Military Lending Act’s 36% annual percentage rate cap to all consumers on payday, high-cost installments, car title loans and credit cards. The MLA fee cap currently applies only to military personnel and their families, but not to veterans or surviving spouses.
The Senate Banking Committee held an audience in July on a companion bill co-sponsored by President Sherrod Brown, D-Ohio, and Sens. Jack Reed, DR.I., Jeff Merkley, D-Ore., Chris Van Hollen, D-Md. Both bills were first introduced at the end of 2019.
Meanwhile, on Thursday, Representative Nydia M. Velázquez, DN.Y., chair of the House Small Business Committee, and Senator Robert Menendez, DN.J., introduced the Small Business Lending Disclosure Act. With a related Senate bill, it would subject small business lenders to the Truth in Lending Act, which requires disclosure of key loan terms such as the annual percentage rate on a loan. It would also give the Consumer Financial Protection Bureau the power to monitor small business lenders.
However, while the passage of either proposal in the House is a possibility, analysts doubt they can garner the 10 Republican votes needed in the Senate even if they receive the full support of the Democrats. Meanwhile, Congress is still concerned about the attempt to pass President Biden’s Build Back Better social spending program.
But the legislative campaign to put a rate cap and disclosure of small business loans could still highlight some predatory lending practices.
“Even though I believe these bills will not be enacted, we should still expect that there will be considerable pressure on high-cost lenders,” said Isaac Boltansky, Managing Director and Director of Research policy at BTIG, an institutional trading company. and research firm. “I think these bills should be viewed primarily as courier documents that will provide some degree of policy cover for state-level actions and regulatory measures, which will be a barrier for high-cost lenders. . “
The rate cap legislation comes more than a year after the Consumer Financial Protection Bureau under the Trump administration emptied a payday loan rule it would have placed limits on small lenders.
In 2015, Congress expanded the Military Loans Act to include credit cards, installment loans, and overdraft lines in the 36% rate cap for the military. When first enacted in 2006, the MLA initially applied to a narrow range of payday, auto title and tax refund anticipation loans.
Experts say lenders have been able to comply with the AMLA changes. Some lenders have voluntarily limited the maximum annual rate applied to personal loans to a maximum of 36%, including fees and commissions.
“Because the military loan act had worked so well and because the implementation was so easy, without any complaints from the industry and the protections were so strong, we said why can’t we extend this to everyone, ”said Paul E. Kantwill, the Founder Executive Director of the Rule of Law Institute at Loyola University Chicago School of Law.
Kantwill, a former CFPB deputy director of the Office of Military Affairs, helped draft rate cap legislation with Christopher Peterson, professor of law at the University of Utah SJ Quinney College of Law and former special adviser of the CFPB.
Consumer groups say the imposition of a federal rate cap enjoys broad public support at state level and some business groups, including the American Fintech Council.
In Nebraska last year, 83% of voters approved a voting initiative limiting annual payday loan rates to 36%. Illinois Governor JB Pritzker sign a bill in March capping rates at 36%.
So far, 18 states and the District of Columbia have placed restrictions on payday loans, according to US PIRG, the federation of state public interest research groups. And 45 states have set rate caps on some types installment loans, according to the National Consumer Law Center.
But Republicans and industry representatives have long argued that placing broad restrictions on loan pricing would hurt consumers by restricting access to credit.
Some also argue that high interest rates don’t necessarily translate into high costs. For example, a $ 200 payday loan that is due in two weeks carries an annualized rate of 520%, but the consumer may be willing to pay $ 40 for the quick cash.
“Americans should be able to make their own credit decisions,” said Tom Miller, professor of finance at Mississippi State University and senior researcher at Consumers’ Research, an independent, nonprofit group. “If there is still a demand for loans to cover some basic living expenses, but no loans available, what will low-income consumers do? “
Supporters of legislation that would require disclosure of the prices of small business loans are also claiming bipartisan support at the state level, noting that Republican lawmakers are keen to promote fair and competitive markets.
“The purpose of this bill is to allow small businesses to shop,” said Louis Caditz-Peck, director of public policy at LendingClub, an online lender in San Francisco. “It will also create incentives in the market to reduce the cost of credit, as lenders will have to compete on price.”
California passed a law in 2018 that imposed disclosure requirements, similar to those in the federal Lending Truth Act, on business loans of $ 500,000 or less. Disclosures generally include the total cost of funding expressed in both dollars and an annualized rate. New York passed similar legislation last year, and similar bills are pending in Connecticut, Maryland, New Jersey and North Carolina.
Research by the Federal Reserve has found that small businesses do not receive the information they need to compare loan prices and that some commonly used pricing metrics are misleading.
However, Republicans might not want to give the CFPB additional powers to control small business lenders because of their general antipathy to the agency, some said.
But lawmakers may be willing to subject small business loans to further scrutiny, primarily because many loans are secured by real estate, such as a home, which puts business owners at financial risk.
A group supporting the legislation, the Responsible Business Lending Coalition, which includes fintechs and community groups, estimates that the legislation will save nearly one million small business owners around $ 4.7 billion a year.
Boltansky said the two proposals aim to grab headlines to show Democrats are trying to help consumers and small businesses and influence state-level actions. He also expects more pressure from regulators on banks partnering with non-bank lenders.
“We should expect more hearings, more press and more public statements, because these are issues that concern Democrats,” Boltansky said.