On April 30, 2019, the House Committee on Financial Services held a hearing on “Ending Debt Traps in the Payday and Small Dollar Credit Industry,” which focused on three potential bills.
Discussion Draft of Protecting Consumers from Debt Traps and Unreasonable Rates Act
This draft, based on legislation sponsored by Senators Durbin and Merkley and Representatives Cartwright and Cohen in prior Congresses, would impose a 36 percent usury APR cap for all open-end and closed-end consumer credit transactions, including mortgages, car loans, overdraft loans, car title loans, and payday loans. The bill would permit initial application fees and the recovery of ongoing lender costs, such as insufficient funds fees and late fees. The proposal would not preempt stricter state laws, and it would create specific penalties for violations of the cap and allow for enforcement through civil courts and by state Attorneys General.
H.R.1285, the Improving Access to Traditional Banking Act of 2019
Introduced by Rep. David Scott, this bill would establish the Consumer Bureau the Office for Under-Banked, Un-Banked, and Underserved Consumers. This office would, in part, periodically study and report on barriers for individuals and families that do not participate in the traditional banking system, coordinate with other agencies, and develop strategies to increase participation in the traditional banking system.
Fund Small Dollar Loan Program
Subcommittee Chairman Meeks led a letter to the Appropriations Committee requesting $10 million to fund Dodd-Frank’s Small Dollar Loan Program, which is administered by the Community Development Financial Institutions Fund (CDFI Fund). Joined by several other Members, this letter promotes the prioritization of Section 1206 of the Dodd-Frank Act, which authorized the CDFI Fund to provide financial assistance for the creation of loan loss reserves to support small dollar loan offerings among CDFIs, including certified banks and credit unions. The program has never been funded but would help individuals build credit, access affordable capital and enter the mainstream financial system.
A&B Takeaway
Though each of the three bills were mentioned during the hearing, the majority of the discussion focused on the first bill and attempting to reach consensus on the 36% percent usury cap, which is the rate currently applied nationwide with respect to loans made to military personnel. Various witnesses and Congressmen testified about the perils and advantages of payday lending, but consensus appeared to exist regarding a few points: (1) many unbanked and underbanked individuals need access to some form of credit like payday loans; (2) some payday lenders make predatory loans that trap consumers in a debt cycle; and (3) online payday lending is more likely to be predatory or create a debt trap. Additionally, most witnesses and Congressmen appeared to agree that the 36% usury rate cap is a potentially viable compromise. Lastly, there was some discussion of the CFPB’s plan to rescind the Payday Rule. Many witnesses and Congressmen expressed the view that this regulation was a long-time coming and that rescinding the Rule would be a huge missed opportunity for consumers.
In all, the key takeaway from this hearing is that discussions are taking place in the legislature with the goal of implementing national usury caps (be that with respect to individual products like small-dollar loans or across the entire lending industry). Yet another example is the bill introduced by Senator Bernie Sanders and Representative Alexandria Ocasio-Cortez, just over a week after this hearing, proposing a national consumer credit interest rate cap at 15%. While this bill hasn’t necessarily gained traction, it made quite a splash in the media and is helping drive the discussion over how to best regulate interest rates nationwide.