Today, 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.”
Absolutely: ensuring affordable access to credit for lower-income families and workers is a noble and worthwhile goal. That goal is not achieved with legislative proposals such as the imposition of a 36 percent interest rate cap. Lower-income individuals rely on safe and affordable small-dollar lending offered by financial institutions to cover unexpected expenses. An artificial interest rate cap restricts incentives for financial institutions to provide such small dollar lending services to subprime borrowers. Without incentives, the institutions offering these products will simply stop offering them. Without access to these vital products, borrowers might find themselves with few, if any, options.
It should also be noted that top-down interest rate advocates fail to justify their proposals by merely citing the Annual Percentage Rate (APR) of a loan. Context is critical to understanding the purpose of small-dollar high-interest loans.To suggest that small-dollar loans from reputable financial institutions are excessively expensive by pointing to their APR fails to recognize the reality of how such products are utilized. These small loans are designed to cover emergency expenditures and are often paid back by borrowers within a short period of time. To justify rate caps by discussing such a loan’s cost in terms of a year is, as the economist Thomas Sowell has pointed out, “like saying that a $100 a night hotel room costs $36,500 a year, when virtually nobody rents a hotel room for a year.”
By considering this option, Congress is taking the role of “mother knows best”. They are effectively removing the decision making ability of borrowers. It’s easy to sit in your house with electricity and heat with a functioning car to take you to your place of work in the morning and pass judgement on people of lesser means who have been shut out by mainstream lenders. Given the events of the past year and the negative impact lockdowns have had, especially on low-wage workers, it would seem that the Legislature should have higher priorities than eliminating needed financial options for working people.
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.
|Senator Ben Ray Luján
|Senator Martin Heinrich