Payday/High-cost Loans

Landmark Bill Will Protect Consumers and Veterans from Predatory Lending

Bill Introduced Today in the Senate Will Cap Interest Rates at 36% for All Americans

Washington D.C. — Today, legislation was introduced in the Senate that would establish simple, common-sense, and essential protections for veterans, unactivated reservists, and all consumers against predatory lending.  The Veterans and Consumers Fair Credit Act (VCFCA) is sponsored by Senator Jack Reed (Rhode Island), Senator Jeff Merkley (Oregon), and Chairman of the Senate Committee on Banking, Housing, and Urban Affairs Sherrod Brown (Ohio), as well as Senators Tina Smith (Minnesota), Cory Booker (New Jersey), Richard Blumenthal (Connecticut), Brian Schatz (Hawaii), Dianne Feinstein (California), Raphael Warnock (Georgia), Patrick Leahy (Vermont), and Ron Wyden (Washington). The legislation reestablishes usury laws that existed in nearly every state throughout most of the 20th century and protects consumers from predatory lenders that have historically targeted vulnerable consumers including veterans, senior citizens, low- income consumers, rural consumers, and communities of color. This landmark legislation is reintroduced on the heels of a bipartisan referendum on the harmful rent-a-bank model that is being used by predatory payday and installment lenders to make triple-digit interest rate loans that are illegal across the country.

“This important legislation is needed now more than ever as consumers across the country try to recover from the financial ruin caused by the COVID-19 pandemic,” said Rachel Gittleman, Financial Services Outreach Manager with the Consumer Federation of America (CFA). “We thank Senator Jack Reed, Senator Jeff Merkley, and Chairman Sherrod Brown for stepping up to ensure that consumers are protected from these predatory, high-cost lenders that thrive on the unaffordable debt trap created by the borrower’s inability to repay and continual reborrowing.”

This legislation, supported by 188 groups and academics representing all 50 states and the District of Columbia, extends protections that currently exist for our nation’s servicemembers through the Military Lending Act (MLA) to veterans, Gold Star Families, unactivated reservists, and all consumers.  The MLA passed in 2006 and caps the Annual Percentage Rate (APR) on loans offered to servicemembers and their families at 36 percent. The MLA has helped curb predatory lending among military members, as have rate caps in eighteen states and the District of Columbia that prevent short-term payday loans. However, the MLA fails to protect veterans or surviving family members, who have made unparalleled sacrifices for this country, and does not protect American consumers who live in states that do not have any limits on the amount of interest a lender can charge.

“Payday loans disproportionately target and harm those who have historically been excluded from mainstream financial services,” Gittleman continued. “By disproportionately locating storefronts in majority Black and Latino neighborhoods, predatory payday lenders systemically target communities of color, stripping these consumers of wealth and further exacerbating the racial wealth gap. This legislation not only protects Black, Latino and other consumers of color who have been targeted by predatory lenders, but also protects other communities, including veteran, low-income, rural, and senior citizen consumers, targeted by high cost lenders who see their historic financial exclusion as a ticket to exploitation.”

The proposed VCFCA would amend the Truth in Lending Act (TILA) to extend the MLA’s 36 percent APR cap to all consumers, covering payday, car-title and other high-cost toxic loans. This legislation will uphold stronger state protections, as 36% is a relatively high rate and only appropriate as an upper limit. A super-majority of both Republican and Democratic voters support reestablishing the traditional interest rate limits that were in effect throughout the vast majority of American history as illustrated through recent polling and every recent ballot measure held on the subject.

Problems in the repayment of payday loans and similar forms of high-cost debt rarely end with the next paycheck. Predatory loans trap families in cycles of debt with triple-digit interest rates, leading to ever-increasing loan balances that the vast majority of borrowers will struggle to repay. Instead, borrowers are forced to take on loan after loan in an attempt to pay back the loan’s original balance, now inflated with interest costs and additional fees: in fact, more than 80% of payday loans are re-borrowed within two weeks. Lender profits depend on a consistent cycle of re-borrowing. Data from the Consumer Financial Protection Bureau show that 75% of all payday loan fees come from victims who wind up taking out an average of 10 loans before they can finally pay off their debt. Many will see their cycle of debt last even longer. The repercussions are often devastating – consumers are unable to afford basic living expenses and can end up bankrupt, their property repossessed, and their bank accounts closed. Not only do these loans severely damage a family’s finances, but they result in financial pressure that can lead to anxiety, depression, and even suicide.

“We applaud Senator Jack Reed, Senator Jeff Merkley, and Chairman Sherrod Brown for their leadership in introducing this critical legislation. All consumers should be able to access safe, affordable credit without being forced into a downward spiral of high-cost debt,” said Rachel Weintraub, CFA’s Legislative Director and General Counsel.

Contact: Rachel Gittleman, 609-571-5953