Last Tuesday (April 30), the House Financial Services’ Subcommittee on Consumer Protection and Financial Institutions convened a hearing entitled, “Ending Debt Traps in the Payday and Small Dollar Credit Industry.” The meeting focused on payday loans, without referencing traditional installment loans. Nevertheless, there was great deal in the meeting of interest and concern to NILA, particularly when viewed in the context of the reintroduction, 24 hours after the meeting (May 1), of a bill intended to cap APR on consumer loansat 36%, by Senator Dick Durbin (D-Ill).
As is typical of Capitol Hill hearings, it was light on substance and big on hyperbole in discussions of payday and title loans. Committee Democrats took the opportunity to repeatedly attacked the Administration for reopening the CFPB’s “payday rule”.
Of particular concern to NILA members were repeated suggestions to extend the Military Lending Act’s (“MLA”) 36 percent APR cap to all loans for all borrowers (the effect of the new bill unveiled by Senator Durbin 24 hours later). The most significant instance of this was when Representative Maxine Waters (D-CA) suggested such a rate cap was “an emerging idea” in a back and forth with one witness, who deemed a 36 percent rate “moral and just.” Representative. Andy Barr (R-KY), also pointed out that in order to sustain a small-dollar product, a large national bank had to charge more than double 36 percent.
Other witnesses included Diego Zuluaga with the Cato Institute, who said that he had the opportunity to study in detail the impact of payday loan interest-rate caps in the United Kingdom and found that, while UK regulators expected loan volume to decline by 11 percent after the introduction of the cap, it dropped by 56 percent – five times what regulators estimated – within 18 months.
Garry Reeder from the Center for Financial Services Innovation (CFSI) highlighted CFSI’s compass principles, which support the installment lending model.He outlined the characteristics of small dollar credit products that “embrace inclusion, build trust, promote success, and create opportunity among borrowers”. These characteristics track closely with those of Traditional Installment Loans, in part, due to the work of NILA members with CFSI at the time they were compiled. (For more detail, those characteristics are outlined beginning on page 5 of Mr. Reeder’s written testimony which can be found here).
NILA’s position on the matters debated is straightforward: The need is there for high quality SDC and it is need that drives demand. This demand cannot be legislated away, which is what a 36% APR cap amounts to. As groups like Pew and CFSI have shown, there are far more useful and relevant aspects to defining high quality small dollar credit than APR. In fact, as our own FAQs demonstrate, there is an inverse relationship between cost and rate, and between affordability and rate. The bottom line is that traditional installment loans offer a policy solution for lawmakers who want to drive financial capability and mobility by ensuring that safe and affordable credit is widely available.
NILA’s FAQs, which are designed to shed light on these matters, for policymakers and others, can be accessed here.