Disputing CU Trades, Credit Union CEO Says 36% Rate Won’t Eliminate Short-Term Credit

Financial services companies would continue to make loans—and make money on the deals—if Congress decides to place a 36% interest rate cap on short-term loans, Richard Williams, president/CEO of the Essential Credit Union told a Senate committee Wednesday.

“We continue to believe that it is possible and reasonable to offer small dollar loans under 36% as proposed by this bill because we do,” Williams, president of the Baton Rouge, La.-based Community Development Financial Institution, told the Senate Banking Committee. He added, “There are many community development credit unions ready to meet the small dollar borrowing needs of the consumer.”

He said that his credit union offers short-term loans with a 28% interest rate—the ceiling that the National Credit Union Administration has placed on short-term loans.

“The program has been very profitable for us,” he said.

Williams’s testimony conflicts with the positions of the Credit Union National Association and the National Association of Federally-Insured Credit Unions. Those groups have joined banking trade organizations in opposing the legislation.

While Williams said that many CDFI credit unions are ready to offer short-term loans, fewer than 600 credit unions offer payday alternative loans, according to Senate Banking Committee ranking Republican Sen. Pat Toomey of Pennsylvania.

The panel’s hearing focused on legislation that would impose the same interest rate cap on short-term loans as the one included in the Military Lending Act. This week Banking Committee Chairman Sherrod Brown, D-Ohio, and panel member Sen. Jack Reed, D-R.I., led a group of ten Democrats in introducing that legislation.

Sen. Catherine Cortez Masto, D-Nev., noted, however, that the bill would exempt federal credit unions from the measure. Ashley Harrington, federal advocacy director and senior counsel at the Center for Responsible Lending said that federal credit unions already have a 28% cap imposed by the NCUA.

The bill is intended to eliminate the short-term, payday loans that lock borrowers into a cycle of debt, Brown told the committee. “Yes, we do want to cut off access to loans at interest rates so high that they ruin people’s lives,” he said. “That’s the whole point.”

But Toomey said the legislation would result in reduced credit opportunities. “Congress should not remove, but expand, access to credit,” he said.

That sentiment was echoed by Rep. Barry Loudermilk, R-Ga., who said, “Many lenders simply would not offer small loans anymore, or consumers would be forced to borrow more money than they need or have a longer-term loan to get the APR under 36%.”

In her testimony, Harrington said that payday lenders lock customers in a cycle of debt. “The typical payday loan borrower is stuck in 10 loans a year, generally taken in rapid back-to-back succession,” she said.

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