Dangers of National Rate Cap Highlighted During House Financial Services Committee Hearing February 06, 2020 Yesterday, February 5th, AFSA staff attended the House Financial Services Committee’s first of two hearings entitled, “Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps.” The second is scheduled for February 26th. The purpose of the hearing was to examine the need for a national rate cap on consumer loans (specifically, H.R. 5050’s 36% all-in rate cap) to protect consumers against “rent-a-banks” and payday lenders. Witnesses included consumer advocates, the sponsor of California’s "Fair Access to Credit Act", and a research fellow from the Mercatus Center. A number of issues were raised during the hearing. Republican committee members focused on the impact of a rate cap on access to credit, particularly for the underbanked and unbanked, potentially leading consumers to unregulated and illegal loan alternatives. Rep. Brad Sherman (D-CA) stated that APR is not the best way to evaluate the cost of small-dollar loans, emphasizing that a $2 ATM fee would be about a100,000% interest rate if it were a loan, but is considered a fair fee. Rep. David Scott (D-GA) expressed concern about how a national rate cap would affect credit access, particularly for low-income families, forcing them to take out larger loans than they need and putting them at greater risk of default. Rep. Barry Loudermilk (R-GA) highlighted a study indicating that a breakeven APR for a $2,600 loan is 36%, therefore demonstrating that a 36% rate cap effectively eliminates all small-dollar loans under $2,600. Rep. Van Taylor (R-TX) emphasized the many costs lenders incur that impact the APR charged for a loan, such as processing fees, employee salaries, regulatory burdens and IT work. He asked consumer advocates what profit margin they deemed acceptable, to which they had no answer. AFSA has been meeting with members of the committee over the past several months, describing the benefits of installment lending and the dangers of a harmful rate cap on access to credit. We will continue to engage with members of the committee and their staff about the negative effects this legislation would have, as well as reinforcing the crucial role our industry plays in the American economy and the day to day lives of our customers.