Is There a Nationwide Cap on High Interest Rate Loans Coming?

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  • The Veterans and Consumers Fair Credit Act wants to cap interest rates on consumer loans at 36%
  • African Americans are 2x as likely to take out a payday loan than other ethnicities

Senators from Oregon, Ohio, Maryland and Rhode Island introduced the Veterans and Consumers Fair Credit legislation, which has a nationwide interest rate on consumer loans at 36%. The legislation extends the protections of the Military Lending Act (MLA) and has been endorsed by a wide variety of consumer and civil rights organizations. Since African Americans are twice as likely to take out a payday loan than other ethnicities, how helpful could this bill be to individuals needing access to emergency cash?

Why This Matters: U.S. Consumers borrow $90 billion every year in short-term small dollar loans. It’s easy to see how this type of installment lending has evolved into a profitable juggernaut, with revenue jumping from $4.3 million to $6.5 million over a four-year period. Back to 2006 Congress passed the MLA to rein in predatory payday lenders and other loan product providers with abusive lending practices leading American troops into cycles of debt. It seemed like this was going to help curtail the entire industry. Unfortunately, that wasn’t the case because the legislation left veterans, Gold Star families, and other American consumers vulnerable to those same lending practices and products.

Payday and car title stores are concentrated in communities of color

When you look at the Black community, they make up 18.2% of the unbanked and 31.1% of the underbanked group in the U.S., according to the Federal Deposit Insurance Corporation. Payday lenders are the financial institutions of choice for many of the individuals who fall in these categories, so a nationwide interest rate cap could be very beneficial for minorities.

There is likely to be strong lobbying against a nationwide interest rate cap. Critics of implementing the cap cite a World Bank policy paper that found, while rate caps can prevent predatory lending, they can also have unintended consequences. It’s important to note that payday and car title stores are concentrated in communities of color, according to the Center for Responsible Lending.

Situational Awareness: Some states have already taken on the responsibility of not letting interest rates get out of control. New York, Massachusetts, Connecticut, Colorado, Arizona and South Dakota are the states that have already passed rate cap legislation. This is great news for cash-strapped minorities.

CBx Vibe: “ATM” J. Cole

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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