A recent blog post by Iain Murray at the Competitive Enterprise Institute acknowledges rising concerns that the new leadership at the Consumer Financial Protection Bureau (CFPB) might renew attempts to impose a price cap on Annual Percentage Rates (APR) for small dollar loans.
He lays out the reasons why this would be a mistake, initially citing the fact that the CFPB, under the Dodd-Frank Act that created it, has no power to impose a usury cap. Despite this, Mr. Murray indicates that it is likely that the 36 percent figure used in the Military Lending Act is likely again to be the focus of rulemaking. This despite the fact that:
“…the commonly-touted figure of a 36 percent APR cap has little rational basis and does not perform as advertised.”
He notes that 36 percent figure is simply the cap used in the Military Lending Act, where it was supposed to stop enlisted military personnel from getting into too much debt and that the CFPB’s own taskforce has reported that:
“…use of alternative financial products is estimated six to eight times higher among military families than among the general public”.
He uses the findings another CEI study, The 400 Percent Loan, the $36,000 Hotel Room, and the Unicorn, to show that,
“…applying annualized analyses like APR to loans of much shorter duration is an apples-to-oranges comparison.”
This is a point we at NILA have been making consistently and is laid out clearly in our Frequently Asked Questions.
The whole post can be viewed here: The New CFPB Leadership Should Avoid Rate Caps on Small Dollar Loans.