Interest rate cap proposal would hurt small dollar borrowers

A rate cap bill introduced by Sen. Jake Reed, D-RI is raising concerns about its potential negative impact on consumers who need access to small dollar loans. CUNA, NAFCU, and other financial trade associations joined in a letter to address this and other issues with the bill, which would cap consumer loan rates at 36%.

“Its impact would extend far beyond payday lenders to the broader consumer credit market to cover affordable small dollar loans that financial institutions are being encouraged to offer, along with credit cards, personal loans, and overdraft lines of credit. As a result, many consumers who currently rely on credit cards or personal loans would be forced to turn elsewhere for short-term financing needs, including pawn shops, or worse– loan sharks, unregulated online lenders, and the black market,” the letter reads.

“A 36 percent annual percentage rate (APR) cap, however calculated, will mean financial institutions will be unable to profitably offer affordable small dollar loans to consumers. For a loan product to be sustainable, lenders must be able to recover costs. Costs include not only the cost of funds availability, but also costs related to compliance, customer service, IT, underwriting, administration, defaults, and, most notably– losses,” it adds.