Bill Would Expand Interest Rate Cap

Financial Services Law

A new bill introduced in both houses of Congress would extend the Military Lending Act’s (MLA’s) 36 percent per annum interest rate cap to all consumer borrowers, not just military service members. The change would affect all MLA-covered loans.

Introduction of the measure was met with fierce opposition from certain industry participants.

What happened

In the Senate, the Veterans and Consumers Fair Credit Act was introduced by Sens. Sherrod Brown (D-Ohio), Jeff Merkley (D-Ore.), Jack Reed (D-R.I.) and Chris Van Hollen (D-Md.); Reps. Jesus Garcia (D-Ill.) and Glenn Grothman (R-Wis.) presented the measure in the House.

Like the MLA, the proposal generally would cap the cost of certain types of consumer credit at 36 percent per annum, including periodic interest and also additional fees or add-ons. The bill would not preempt state laws with lower caps in place. The types of credit covered would be the same as under the MLA, including payday and vehicle title loans, and would exclude, for example, home loans.

The legislation was referred to the Senate Banking, Housing and Urban Affairs Committee for consideration.

Passage of S. 2833 will be an uphill battle.

The Online Lenders Alliance told NPR that it estimates 150 million Americans would be “redlined” from access to credit as a result of the proposed legislation, while the Community Financial Services Association of America said that “[r]estricting access to legal and licensed credit does nothing to address the underlying need for small-dollar loan products and could force millions of people to seek out dangerous alternatives such as unscrupulous, unlicensed, offshore or otherwise illegal lenders.”

Supporters of the measure point to the same reasons behind the enactment of the MLA’s rate cap.

“We already protect military service members under the Military Lending Act, which means that we have recognized the predatory nature of high-interest loans to our men and women in uniform,” Rep. Grothman said in a statement. “This raises the question – if it is wrong to allow predatory lenders to target our service members, why is it right to let them target the rest of the community?”

To read S. 2833, click here.

Why it matters

While passage of the legislation seems highly unlikely, given the pushback from the industry as well as the current political climate in Congress, the mere introduction of the bill reflects a growing legislative momentum to cap consumer interest rates across the country.