Interest rate caps are popular — for good reason

An op-ed by American Financial Services Association CEO Bill Himpler recently took issue with the Center for Responsible Lending’s (CRL) recent poll showing that 70 percent of voters approve of limiting interest rates on consumer loans to 36 percent interest. It also takes issue with the use of an annual interest rate to ensure that borrowers understand the cost of a loan. Let’s set the record straight.

The poll’s findings, along with the passage of ballot initiatives, suggest broad support across party lines for the idea that sky-high interest rates sap wealth from communities, and capping rates at no more than 36 percent annual interest protects people from abusive lending. Approximately 100 million Americans live in states with interest rate caps of 36 percent or lower that keep payday and car title lenders out. Most states cap rates on installment loans as well.

As shown in recent CRL research, two years after a 2016 ballot initiative to cap rates at 36 percent annual interest, Republican voters in South Dakota overwhelming opposed efforts to roll back the rate cap, and stated they would be less likely to support a candidate for office who attempted to undo that cap. No misdirection here, as voters had been living with the results of the rate cap and still support it.

In 2018, over 77 percent of voters in Colorado chose to cap annual interest rates at 36 percent, even after previous changes to state law that stopped some abusive practices but allowed long-term payday lending (i.e. installment payday loans) to flourish at rates averaging 129 percent. No sleight of hand here, as Colorado voters had the first-hand experience with long-term payday lending and inadequate reforms — and chose a 36 percent rate cap instead.

One more point. Interest rates matter. Interest rates determine how much a borrower will pay for a loan, and that is an important component of affordability. For payday loans that regularly trap borrowers in expensive long-term debt, installment loans of many thousands of dollars that can last for years on end, and all other loans, expressing the cost of the loan in terms of an annual rate is more important than ever in facilitating an apples-to-apples comparison for consumers.

Exploitative rates can result in borrowers paying sometimes four times what they borrowed. Thankfully, voters understand why this is harmful, and 70 percent of registered voters support capping rates for payday and installment loans at 36 percent.

Thankfully, Congress has already taken steps to introduce a common-sense and state-tested rate cap of 36 percent annual interest while not preempting states with lower caps. The Veterans and Consumers Fair Credit Act — H.R. 5050 / S. 2833 — was introduced by Reps. Jesús “Chuy” García (D-Ill.) and Glenn Grothman (R-Wis.) in the House and Sen. Jeff Merkley (D-Ore.) in the Senate. House Financial Services Committee Chairwoman Waters plans to advance the bill this year.

This legislation follows recent actions by the Consumer Financial Protection Bureau (CFPB) to roll back a national rule designed to curb the harms caused by unaffordable payday and car title loans (not surprisingly, voters overwhelming oppose this roll back as well). While the CFPB, under its current leadership, decides whether it is on the side of consumers or wants to provide legal cover for unfair and abusive lending practices, we urge Congress to pass H.R. 5050, a sensible 36 percent rate cap designed to prevent the worst abuses.

One thing is clear, we need more — not less — rigorous oversight by the states, Congress, and the CFPB to prevent predatory lending.  It’s really that simple, and the public supports it.

Tom Feltner is an Executive Vice President and the Director of Research at the Center for Responsible Lending.