U.S. Senate Bill to Cap Interest Rates on All Consumer Loans; Targets Payday Lending

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In an effort to effectively end the high interest rates charged to consumers who take out short-term – or payday – loans, a group of U.S. Senate Democrats Tuesday introduced a bill that would cap annual interest rates at 36 percent for all consumer credit transactions.

The bill, S.673, is sponsored by Dick Durbin (D-Ill.), the Senate’s Majority Whip. The bill has four additional co-sponsors: Sen. Jeff Merkley (D-Ore.), Richard Blumenthal (D-Conn.), Sheldon Whitehouse (D-R.I.), and Barbara Boxer (D-Calif.).

“As we climb out of the worst recession in a generation, many working families continue to struggle, Sen. Durbin said in a statement. “For some, payday lenders offer a quick way to make ends meet, but often with devastating consequences. With interest rates of two and three hundred percent of value of the loan, these excessive rates and hidden fees have crippling effects on those who can afford it least. Capping interest rates and fees for consumers is a fair and sensible thing to do to protect working families during our economic recovery.”

The effective annual percentage rate (APR) of interest on a payday loan can quickly soar because the loan’s interest is calculated on a weekly, or in some cases daily, basis. After pushback from consumer rights groups and state regulators, many short-term lenders began charging a flat origination fee instead of interest. But the fees result in very high effective APRs when calculated using typical interest methods.

For example, if a payday lender charges a $15 fee on a $100 loan with a term of two weeks, the APR will be 390 percent, even though the consumer is paying 15 percent interest for only two weeks.

Some states have already cracked down on payday lending, legislating the high-interest loans out of practice in a similar fashion to Durbin’s bill. And on the federal level, there is already a 36 percent cap on short-term, auto title, and refund anticipation loans made to members of the U.S. military.

The bill would apply the cap to all consumer credit transactions, including mortgages, car loans, credit cards, overdraft loans, car title loans, refund anticipation loans, and payday loans.

The sponsors see little impact on most credit products since annual interest rates on large common loans – mortgages, car loans, and credit cards – rarely, if ever, exceed 36 percent.

Logistically, S.673 – titled “Protecting Consumers from Unreasonable Credit Rates Act” – amends the Truth in Lending Act (TILA) to establish a national usury rate for consumer credit transactions.

The bill was introduced and read twice Tuesday before being referred to the Senate Committee on Banking, Housing, and Urban Affairs, of which Merkley is a member.

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Posted in Auto Finance Receivables, Banks and Credit Grantors, Collection Laws and Regulations, Credit Grantors, Featured Post .

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  • avatar jer-trihouse says:

    This is great news. The tribes using the sovereign nation model and the offshore based Lenders will get fat on the U.S. consumers denied another choice in solving their financial challenges. Demand for small-dollar loans will not cease; supply will simply be limited. Increases in loan fees and consumer abuse would be the only outcome. All transactions will occur via the Internet.

    Big brother at work again. Dictating how we live. This is not Iran or North Korea.

    This legislation has zero chance of passing. It’s simply more PR for the Dem’s.

    The consumers who actually use these products are not crying out for relief. Even the largest publicly traded Lenders report less than a 1% complaint frequency. This is documented in the 10K conference call any consumer activist can listen-in on if they’re willing to do the “real” work.

    Embrace technology and competition to protect and deliver cheaper products to borrowers the world over. Jer – Trihouse (Yes, I’m biased!)

  • avatar Ameripay says:

    How’s the PDL inventory looking now guys? Still think it’s worth >8% if it’s “fresh?”

    Off shore lenders might come onto the playing field for awhile, but just as with online poker if they are routinely violating laws designed to restrict the activity of US Consumers the government will put an end to it, no matter where they are based.

    Chase has already limited the NSF fees they will charge consumers for PDL payments that bounce. The banks are gearing up for this – better watch your portfolio concentrations…

  • avatar David Russell says:

    “The consumers who actually use these products are not crying out for relief. Even the largest publicly traded Lenders report less than a 1% complaint frequency.”

    The majority of the people using pay day loans are the most desperate and least financially educated people, with the least access to media and decision makers. Just as the same type of people used to go to the neighbourhood loan shark and not complain about their practices they are unlikely to complain much about PDL companies.

  • avatar buffalo-bills says:

    Who cares if they are “financially educated” or not, David? That has nothing to do with this. EVERYBODY knows that 300% interest is “a lot”. EVERYBODY knows that it costs a lot of money to take out a payday loan. EVERYTHING is spelled out for the customer prior to them signing the dotted line. You don’t need a Masters in Economics to understand this this. You barely need a high school education. If they are so stupid that they don’t understand what they are getting into, then perhaps they should be kept inside their homes so the big bad world doesn’t take advantage of them anymore. Issue them a bicycle helmet too…don’t want them walking into a wall and hurting themselves.

  • avatar speedyloans says:

    It’s very short sighted to think you can reduce demand for these loans by blocking the number of stores available. Obviously, these loans serve a need, or they wouldn’t be opening stores. If someone needs a payday loan to make rent, and the alternative is eviction, they’re going to get the loan whether it’s down the street, across town, or online. And for every store you block, that’s probably 10 or more jobs you’re costing the community.

  • avatar Ryan Barker says:

    The increase in payday lending is due to the credit card reform laws passed years ago. The laws made it less profitable to issue sub prime cards and at the same time the banks were required to increase reserves to cover potential losses. So the banks raised some money and cut credit lines and closed accounts.
    Now the banks have seen how profitable short term lending is and are lining up to serve the public behind their bank charter. Nice.

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