As efforts to implement a national rate cap stall, more states are considering banning consumer loans with annual percentage rates above 36%.
New Mexico lawmakers recently approved a 36% rate cap, which would reduce the state’s current maximum APR by 175%. It now awaits the governor’s signature. Lawmakers in Rhode Island and Minnesota are considering similar restrictions, and consumer advocates in Michigan are considering collect signatures for a ballot initiative on the same issue.
The state-level action comes as Congress efforts to institute a national APR cap of 36% remain blocked. The federal legislation, championed by Democratic lawmakers, is similar to the limit Congress put in place for the military in 2006, though it would apply to all borrowers.
Consumer advocates still hope lawmakers will give all consumers “the same kind of protections that Congress thought necessary” for the military, said Yasmin Farahi, senior policy adviser at the Center for Responsible Lending.
But advocates are also working at the state level to cap interest rates at 36% — or lower. This would help prevent borrowers from being “caught in the payday debt trap,” where they are unable to repay triple-digit APRs and end up owing far more interest than they borrowed. origin, Farahi said.
Many states across the country allow payday lenders to charge APRs above 300%, and Texas, Nevada and Idaho allow annual interest rates above 600%, according to a tracker published by the Center for Responsible Lending.
“These are marketed as a quick financial fix, but actually lead to long-term financial distress,” causing consumers to miss other payments and even drive some into bankruptcy, Farahi said.
Trade groups that represent payday lenders and high-cost installment lenders — whose loans are larger and spread over a longer period — oppose these efforts.
They dispute the focus on APRs as an appropriate measure of the cost of a loan, arguing that it is an inappropriate measure for short-term loans. They also say the high fixed costs of making small dollar loans drive APRs above 36%, and prices reflect the risk of offering credit to people with low or low credit scores. non-existent often prevent them from obtaining traditional bank loans.
Rate caps will limit lenders’ ability to operate in some states, giving consumers “fewer credit options available to them to meet their needs,” said Andrew Duke, executive director of the Online Lenders Alliance. , whose members include high-cost lenders like Elevate, Enova, Axcess Financial and CURO Financial Group.
INFiN, a separate trade group that represents payday lenders with branches across the country, said in a statement last month that New Mexico’s rate cap “will leave consumers with little choice but to turn to more expensive, riskier and less regulated alternatives” for credit. .
New Mexico lawmakers approved a rate cap of 36% last month, although legislation allows for an additional 5% fee on loans of $500 or less. Governor Michelle Lujan Grisham, a Democrat, is expected to sign the bill.
The rate cap should add New Mexico to the list of 18 states that impose strict limits on small-dollar consumer loans, according to the Center for Responsible Lending. These states include South DakotaArizona, Montana, Colorado and New York. Washington, DC has similar restrictions.
In 2019, California implemented a 36% rate cap on installment loans between $2,500 and $9,999, although the nation’s most populous state does not have a similar restriction in place for small payday loans, where APRs may exceed 400%.
Last year, Illinois adopted a rate cap of 36% which applies to all consumer loans.
The growing number of states considering rate caps is among “many headwinds” facing high-cost lenders, even though many states are not following suit, said Isaac Boltansky, a policy analyst at research firm BTIG. .
High-cost lenders also face the possibility of greater scrutiny from the Consumer Financial Protection Bureau, Boltansky said, as well as the possibility that the Federal Deposit Insurance Corp. takes a tougher stance on partnerships between banks and non-bank consumer lenders.
In some states, high-cost lenders provide loans directly to customers. But in states with tighter limits, they often partner with FDIC-supervised banks — which critics denounce as “rent-a-bank” deals to evade state rate caps.
Consumer advocates recently demand FDIC leaders, whose board is now made up entirely of Democratic appointees, to sever those partnerships.
The agency “appears to have done nothing to curb the predatory lending that has exploded under its watch,” the National Consumer Law Center and 14 other groups wrote in a letter to the FDIC board, referring to the warrant. of former President Jelena McWilliams, a Republican elected official.
Consumer groups note that high-cost lenders are charging interest rates they could not charge on their own, because their partnerships with a few smaller FDIC-supervised banks allow the export of interest rate rules from l home state of banks.
The Online Lenders Association pushed back on that effort last week, writing in a letter to FDIC board members that partnerships help community banks lend beyond their traditional footprints.
They also wrote that fintechs’ expertise in underwriting loans to consumers who struggle to obtain traditional loans is helping their banking partners reach new customers.
“Fintech companies working as third-party providers for banks can play an important role in building a more inclusive financial system for consumers,” wrote Duke, the group’s chief executive. “These innovations can pave the way for future improvements that will expand credit opportunities and improve consumer credit options.
The FDIC, currently headed by Acting Chairman Martin Gruenberg, declined to comment on the matter.