New Trend in Legislation: Interest Rate Caps

Financial Services Law

From California to Congress, new legislative proposals are attempting to crack down on interest rates.

With interest rates historically set by individual states for particular types of loans, federal caps on interest rates are uncommon (the cap on the MAPR under the Military Lending Act, noted below, being one rare situation) and unlikely to pass in Congress. California’s effort to expand an existing cap has a better chance of success.

What happened

At the federal level, Sen. Dick Durbin (D-Ill.) reintroduced the Protecting Consumers From Unreasonable Credit Rates Act, a measure that would establish an interest rate cap of 36 percent on consumer loans. Senate Bill 1230 would apply to all open-end and closed-end consumer credit transactions, including car loans, payday loans and mortgages.

The cap would encompass all fees and interest rates directly or indirectly ancillary to the extension of credit, from late fees to overdraft fees to credit insurance premiums, whether optional or required.

Lower state interest rate caps would not be preempted by the bill, which would match the limit set by the federal Military Lending Act (MLA).

While consumer groups have indicated their support of the proposed legislation—which made prior appearances in Congress in 2008, 2009, 2012, 2013, 2015 and 2017—the bill has never made it to the full Senate or House of Representatives and appears unlikely to break that streak this year.

Not to be outdone, Sen. Bernie Sanders’ (I-Vt.) Loan Shark Prevention Act would amend the Truth in Lending Act (TILA) to create a new cap on annual percentage rates (APRs) “applicable to any extension of credit” of either the lesser of 15 percent on unpaid balances (including all finance charges) or the maximum rate permitted by state law where the consumer resides.

Fees that are not considered finance charges under TILA could not be used to evade the rate cap, while the total sum of such fees may not exceed the total amount of finance charges assessed. Senate Bill 1389 does feature an exception that permits the Federal Reserve Board of Governors to raise the 15 percent cap for a period not to exceed 18 months after applying a multifactor test.

Both federal measures were referred to the Senate Banking, Housing and Urban Affairs Committee.

On the state level, an attempt to extend rate limitations under a nonbank lender licensing law in California has a better chance of passage. Introduced in February, Assembly Bill 539 would amend the California Financing Law (CFL) to set a 36 percent cap (plus the federal funds rate) on loans of $2,500 or more but less than $10,000, made under the CFL.

For loans of more than $2,500 but less than $10,000, the factors used to determine whether a loan is of a “bona fide principal amount” or if artifice was used to evade the regulations of the CFL would also apply; loans in that dollar range would further be prohibited from terms of less than 12 months.

To read SB 1230, click here.

To read SB 1389, click here.

To read AB 539, click here.

Why it matters

The trend of interest rate cap legislation has spread from states to the federal government, as reflected by the two new bills introduced in Congress. Although the attempt to enact a federal interest rate cap faces a very dubious future, California’s proposal to expand the regulations of the CFL has already passed the Assembly by an overwhelming 60-4 majority and has moved on to the Senate for consideration.