By Jennifer Galloway and David Stewart
New federal legislation introduced in the House and Senate would place a 36% annual percentage rate cap on nearly all consumer loans, potentially killing the small dollar consumer lending industry.
Last fall, Reps. Jesús G. “Chuy” García (D-IL) and Glen Grothman (R-WI) introduced H.R. 5050, the Veterans and Consumers Fair Credit Act. The bill proposes to limit the finance charge on consumer loans to 36%. In essence, the bill would extend the rate cap from the Military Lending Act — currently applicable only to active duty servicemembers and their families — to loans made to all consumers.
The Military Lending Act (MLA) was passed in 2006 in response to a perceived need to protect military personnel from certain predatory lending practices. According to the Congressional Research Service, this was necessary because financial matters affected an individual servicemember’s personal readiness and could lead to revocations of security clearances and to eventual separation from the military. The MLA places limits on the terms of consumer credit extended to active duty servicemembers and their dependents, among other things. One limit under the MLA is creditors may not exceed an annual percentage rate (APR) of 36% on consumer credit. Initially, the DOD limited the application of the MLA to a few closed-end credit products (e.g., payday, auto-title, and tax refund anticipation loans), but in 2015, the DOD expanded the application of the MLA to nearly all consumer loans that are subject to the disclosure requirements of the Truth In Lending Act (TILA).
H.R. 5050 would extend the MLA’s 36% APR cap to loans offered to all consumers, not just active duty servicemembers and their families. The bill also employs MLA’s method for calculating APR, which is differentthan the APR calculation for TILA disclosures and results in a much higher number. Under the MLA (and H.R. 5050), the APR includes all additional fees and fees for ancillary products, regardless of whether the product is optional.
Additionally, a companion bill, S. 2833, has been introduced in the Senate by Sens. Jeff Merkley (D-OR), Jack Reed (D-RI), Sherrod Brown (D-OH), and Chris Van Hollen (D-MD). The Senate bill is essentially identical to the House bill.
Up to this point, federal laws governing consumer financial products primarily sought to ensure that consumers received enough information about the loan products they were obtaining to make an informed choice. Such laws achieved this end by requiring disclosures and prohibiting unfair, deceptive, or abusive acts or practices, and federal law generally left it up to states to determine the substantive rules that would govern loans, including rate caps. Many states, responding to the concerns of their residents, have already customized their usury laws and licensing systems to balance the needs of consumers for credit and for protection from predatory loans in their state.
A 36% APR cap would severely limit consumer access to credit, according to many industry lenders. The cost of credit is often higher in small dollar unsecured lending due to the higher risk of consumer default. The many restrictions on consumer loans mandated by the MLA were aimed at a particular problem applicable only to active duty servicemembers and their families — i.e., to ensure that servicemembers could perform their military duties when they took out loans and would not be penalized during this very unusual time of being on active duty. These concerns do not apply to general consumers.
These bills represent an expansive growth of federal regulation in an area left traditionally to the states and would likely result in a sharp reduction of consumer access to credit. As always, it is important for companies to engage in the political process. If you would like to learn more about how you can engage outside of CFSA, please contact us to learn more about Bradley’s Governmental Affairs Practice Group.
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