Impact of Interest Rate Cap? That Depends on Who You Ask

National Credit Union Administration Chairman Todd Harper says a 36% interest rate cap on consumer loans would have no impact on credit unions. Credit Union trade groups say the cap would force credit union members to take out larger, longer-term loans. The CEO of the Essential Credit Union says that a 36% cap is fine with him. Confused? Who wouldn’t be?

So far, 18 states and the District of Columbia have enacted interest rate caps that are designed to crack down on predatory lending.

Now senators, including Senate Banking Chairman Sherrod Brown, D-Ohio, and Senate Armed Services Chairman Sen. Jack Reed, D-R.I., have reintroduced legislation that would cap interest rates at 36%, the same level as the Military Lending Act.

“There is no reason consumers should be charged a 300% [annual percentage rate] to access credit,” Reed said.

“Many Americans have to renew their loans so many times they end up paying more in fees than the amount they borrowed,” Brown said. “We can put an end to these abusive debt traps by extending the Military Lending Act’s 36% cap on interest rates to veterans, surviving family members, and all consumers.”

At a recent Senate Banking Committee hearing, National Credit Union Administration Chairman Todd Harper was asked what impact the legislation would have on credit unions. Harper responded that most credit union loans are capped at 18%, with loans modeled after the agency’s Payday Alternative Loan program being capped at 28%. “Both of those figures are below the 36%, so my answer is not at all,” he told the senators.

Not so fast, say credit union trade groups.

In a letter sent to senators, the Credit Union National Association and the National Association of Federally-Insured Credit Unions disagreed. They said that the NCUA traditionally does not rely on an all-in APR—one that includes all charges, including fees, to consumers–to determine compliance with interest rate caps.

The Democratic legislation proposes to establish an all-in percentage rate for loans. “While seemingly an innocuous technical change, the broad impact of an all-in APR cap on credit cards and small dollar loans would be seismic,” the trade groups said. “The all-in APR for a short-term, small dollar loan depends heavily on the duration and amount of the loan.”

They said that the 36% cap would require lenders to offer large and longer duration loans because those loans are easier to fit under the interest rate cap. “This effectively encourages borrowers to take on more debt or, for many borrowers with lower creditworthiness, push them out of the market for small dollar credit altogether,” they added.

Still, not all credit unions oppose the rate cap. “We join with other [Community Development Financial Institutions] and credit unions in supporting a national interest rate cap,” Richard Williams, CEO of the Essential Federal Credit Union in Baton Rouge, told the Banking Committee during a recent hearing.

Related:

CU, Banking Trade Groups Fighting 36% Loan Interest Rate Cap Legislation

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

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