The Protecting Consumers from Unreasonable Credit Rates Act, S. 3452, introduced in the Senate by Senator Dick Durbin (D-IL) would create a national interest rate cap of 36 percent. The bill, which would affect payday and car title loans, along with various other types of credit, is a response to the persistent triple digit interest rates common among payday loan and other high-cost loan products.
Essentially, Durbin’s bill establishes a new FAIR, Fee and Interest Rate calculation that includes all fees and creates a rate cap at 36%. The rate is similar to usury caps that are already active in many states and in place for the military and their family members.
To protect consumers from predatory lending practices and to help consumers use credit more wisely, the legislation would:
- Establish a new Fee and Interest Rate (FAIR) that incorporates all interest, fees, finance charges, and related costs of credit.
- Institute a federal maximum annualized FAIR limit equal to 36% and apply this cap to all open-end and closed-end consumer credit transactions, including mortgages, car loans, credit cards, overdraft loans, car title loans, refund anticipation loans, and payday loans.
- Encourage the creation of responsible alternatives to small dollar lending, by providing tolerances for initial application fees and for ongoing lender costs such as insufficient funds fees and late fees.
- Ensure that this federal law does not preempt stricter state laws.
At the same time that Senator Durbin is proposing this needed legislation, the payday loan industry is attempting to deregulate payday lending at the national level. Two proposals, H.R. 6139 and H.R. 1909, have picked up support in the House on the false grounds that they will expand access to credit in underserved communities. Both bills propose to create a new national charter for payday lenders similar to the national bank charter that would allow payday lenders to operate throughout the country, evade existing interest rate caps, and curtail disclosure requirements.
Yet, simply legitimizing payday lenders and other fringe financial services without reforming their products will not provide safe and viable banking solutions to the unbanked/underbanked. Similarly, these bills, unlike Durbin’s bill which would encourage banks to make alternative small dollar loans, do not ensure credit opportunities.
Unfortunately, a similar rate cap proposal that was introduced by Senator Durbin in 2009 failed. Given the payday loan industry’s current attempts to enact pro-industry federal legislation, advocates and consumer groups will need to rally support to ensure that S. 3452 passes instead of H.R. 6139 or H.R. 1909. So contact your senators and representatives today to support fair lending!