An Interest Rate Cap Will Hurt Small Borrowers

Tomorrow, the Senate Banking Committee, led by Chairman Sherrod Brown (D-Ohio), is hosting a hearing titled, “Protecting Americans from Debt Traps by Extending the Military’s 36% Interest Rate Cap to Everyone.”

Politicians often claim to be helping “the poor” with the policies they enact. But people with the resources to take extended time away from their work and spend months in committee hearings are inherently not “representative” of the people of New Mexico. They need to be reminded that most people live “paycheck to paycheck” and struggle to manage an expense from time to time.

If Congress and President Biden approve of extending the Military Lending Act’s (MLA) 36% rate cap for all consumers, not just military veterans, this would devastate the financially vulnerable by reducing their access to credit. It could very well push our most disadvantaged citizens to underground financial products in an unregulated, shadow economy.

“Proponents believe a cap on fees and interest would help consumers, especially subprime borrowers with less-than-perfect credit histories, by limiting what they pay on payday loans and other less-regulated short-term credit,” Credit Union National Association (CUNA) and other coalition members wrote in a letter to the Committee last week. “In reality, its impact would extend far beyond payday lenders to the broader consumer credit market to cover affordable small dollar loans (including “accommodation” loans) that depository institutions are being encouraged to offer, credit cards, personal loans, and overdraft lines of credit. As a result, 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, online lenders—or worse—loan sharks, unregulated online lenders, and the black market.”

Few banks offer personal loans and credit union loans designed for subprime borrowers. Referred to as “payday alternative loans,” these borrowers represent less than 1% of the 100 million Americans who make up the non-prime consumer market. The reality is that most traditional lenders simply will not or cannot make these loans to borrowers with lower credit scores.

One-size-fits all interest rate caps will cut off access to credit and eliminate choices in lending products. We urge Congress to refrain from further restricting the ability of borrowers from accessing credit of their choosing when emergencies arise and pushing them to worse outcomes.