Payday/High-cost Loans

Landmark Bipartisan Bill Will Protect Consumers and Veterans from Predatory Lending

Bills Introduced Today in the House and Senate Will Cap Interest Rates at 36% for All Americans

Washington D.C. — Today legislation that would establish common-sense and essential protections for veterans and consumers against predatory lending was introduced in both houses of Congress.  The bipartisan House legislation is sponsored by Representative Jesús “Chuy” Garcia (Illinois) and Representative Glenn Grothman (Wisconsin).  Senator Sherrod Brown (Ohio), Senator Jeff Merkley (Oregon), Senator Jack Reed (Rhode Island), and Senator Chris Van Hollen (Maryland) are sponsors of the legislation in the Senate. The legislation would impact payday loans, car title loans, and similar forms of high-cost debt.  Recognizing the unique service of veterans and the importance of protecting the health and liberty of all Americans, the Veterans and Consumers Fair Credit Act (VCFCA) caps interest rates on consumer loans at 36 percent.

This legislation extends protections that currently exist for our nation’s servicemembers through the Military Lending Act (MLA), which passed in 2006.  The MLA caps the Annual Percentage Rate (APR) on loans offered to servicemembers and their families at 36 percent. But the MLA does not protect veterans or surviving family members who have made unparalleled sacrifices for this country. Nor does it protect other American consumers, especially those who live in states that do not have any limits on the amount of interest a lender can charge.  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 toxic loans.  This legislation will protect existing state caps where they exist.

Professor Christopher Peterson, Director of Financial Services of the Consumer Federation of America explained, “This bipartisan bill is an incredibly important piece of legislation that extends a critical protection for servicemembers to all consumers.  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.”

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.

This legislation would also reinforce the MLA itself following the Consumer Financial Protection Bureau’s recent refusal to include MLA compliance within its supervisory exams.  Earlier this year CFPB Director Kathy Kraninger announced a decision to stop including Military Lending Act compliance within the agency’s preventative audits of payday lenders, banks, and other financial companies.  The move drew widespread condemnation by consumer rights organizations, military and veterans support organizations, and members of Congress.  A previous Consumer Federation of America report demonstrated that the CFPB’s about face was not legally justified.  If adopted, the legislation introduced today would effectively force the CFPB resume including MLA compliance within preventative exams.

“We applaud Congress for introducing this landmark legislation.  Veterans, Gold Star Families and consumers should be able to access credit at fair rates without being forced into a downward spiral of high-cost chain debt,” said Peterson.

The legislation introduced in Congress today is based on a draft bill coauthored by CFA’s Peterson.  “The U.S. Military, has already shown us how to provide reasonable consumer protections without cutting off access to mainstream forms of credit,” said Peterson, “It’s time for Congress to follow the Pentagon’s lead and extend the same rules that protect soldiers, sailors, airmen, and marines from predatory loans to every American.”