From The CEOs Desk | Arbitrary Rate Caps Harm Instead of Help

Last week I had the pleasure of sitting down with reporter Kellie Meyer of Nexstar, a media company with more than 180 local broadcast affiliates across the country. Our conversation was part of a story on the woefully inaccurately titled “Veterans and Consumers Fair Credit Act,” introduced by Senator Jeff Merkley (D-OR) and others, which would impose a 36% national rate cap (a companion bill is being considered in the House of Representatives).

There is much more to be said about this bill (and AFSA has said quite a bit), which will in no way provide any real assistance to veterans.  That’s just one reason why we oppose this legislation, but on one point, Senator Merkley and AFSA can agree. 

The Senator speaks of the need to put an end to a type of loan that “sucks people into a vortex of debt that they can’t escape from.”  We agree. What the Senator refers to are payday and title loans, products that are very different from the traditional installment loans that AFSA members offer.  

Installment loans are easy-to-understand products from neighborhood storefronts that have been in communities for generations. The loans offered to consumers are fully amortized, don’t have prepayment fees or balloon payments and are reported to credit bureaus. They are made with the explicit expectation that they will be repaid. The interest rates can be higher than the arbitrary 36% rate cap the Senator’s legislation calls for, but they’re far lower than the extortionary rates payday lenders charge.

Essentially, installment loans are the exact opposite of the kinds of products – those made behind plexiglass in ten minutes or less – that the payday industry offers. Sky-high interest rates attached to loans that are designed for the consumer to fail are hallmarks of a payday loan.

We should tread carefully so as not to ensnare legitimate financial institutions like traditional installment lenders. Even former Consumer Financial Protection Bureau (CFPB) Director Richard Cordray agreed that these loans are positive and worth protecting.

Unfortunately, Senator Merkley’s proposal would harm the very people he claims to want to help.  With most legitimate lenders unable to offer anything less than a loan of about $3500 at the 36% capped rate, he will be consigning consumers to a greater amount of debt than perhaps they need or are looking for – or can afford – thus pushing them toward less-scrupulous, gray market lenders. 

You can read more in our previous post about why placing an interest rate cap won’t work.