CBA Testifies Before Senate Banking Committee on Need to Protect Access to Credit


WASHINGTON – Testifying before the U.S. Senate Banking Committee today, Consumer Bankers Association General Counsel and Senior Vice President, David Pommerehn, said imposing a new cap on interest rates would threaten consumers’ access to affordable credit, harming low- and moderate-income communities most.

Pommerehn prepared the following remarks for delivery ahead of Thursday’s hearing:

Chairman Brown, Ranking Member Toomey, and members of the committee, I am David Pommerehn, General Counsel at the Consumer Bankers Association and I appreciate the opportunity to testify at today’s hearing.  CBA is the voice of the retail banking industry whose products and services provide access to credit to millions of consumers and small businesses. Our members operate in all 50 states, serve more than 150 million Americans, and collectively hold two-thirds of the country’s total depository assets.

A fundamental aspect of lending and a cornerstone to prudent banking practices is the ability for banks to price for risk. 

While well-intentioned, a cap on interest rates is not an effective policy for protecting against debt traps or other negative outcomes for consumers. Banks in the United States are highly regulated entities that carefully and appropriately price risk before extending credit to anyone. Placing a cap on that price in the form of an all-in maximum annualized percentage rate does not mean that consumers will get lower rates on their loan; it means that in many cases consumers will not have the option to access a loan at all. Research today demonstrates that interest rate caps reduce credit availability and create negative outcomes for the populations their proponents intend to benefit. 

While many products are impacted by the proposed rate caps, today I am going to focus on two products that will most certainly be affected: short-term, small-dollar products and consumer credit cards. 

Today, the need for accessible small-dollar credit for consumers has never been greater.  A recovering economy has left consumers with less of a cushion for emergencies and reduced credit options, making access to reasonably priced small-dollar liquidity products even more important. By now, we are all familiar with the many reports, including those by the Federal Reserve Board, indicating that nearly half of all American adults say they cannot cover an unexpected expense of $400.   Accordingly, policymakers have encouraged banks to enter or remain in the small-dollar lending market. Over years, banks have worked with regulators to carefully design these products to ensure consumers strong safeguards at reasonable prices.

Low- and moderate-income communities, and those seeking small-dollar, emergency funds are impacted the most. A 36% rate cap leaves banks unable to viably offer affordable short-term credit. For a loan product to be sustainable, banks must be able to recover costs. Costs include not only the loan amount, but also costs related to compliance, determining a borrower’s ability-to-repay, customer service, IT, underwriting, administration, and defaults (including losses). An inflexible APR cap that incorporates fees as well as the risk-based interest rate available to the borrower make it exceedingly difficult for responsible lenders to extend credit to those in need. 

Policymakers should consider the consumer benefit of short term-small dollar loans and the true cost of making them.  For example, a $50 loan at a fee of just 5% with a term of 30 days carries an APR of nearly 70%, nearly twice the proposed cap. This $50 may have covered a utility bill, a difference in a car payment, paid for gas to get to work, or more. One can see that this $2.50 fee is well worth the benefit to the borrower under these contexts. 

Another product, credit cards, will also be adversely affected by the proposed caps. The consumer credit card market today offers a wide variety of products designed to meet the needs of different consumers at a variety of price points. Many customers choose cards with annual membership fees because such products offer non-credit related features such as reward programs, travel and dining benefits, and insurance. Though ostensibly designed to curb predatory lending practices, extending the MAPR cap to this type of consumer lending would have the negative and unintended consequence of limiting customer choice and reducing the availability of these credit card rewards and their benefits.

As outlined, the proposed MAPR is not simply a 36 percent cap on interest. Unlike the standard calculation of an APR under the Truth in Lending Act, the MAPR incorporates various fees that may be charged on the account, including the annual membership fee. Because the MAPR is calculated on an annualized basis, membership fees that are charged once a year are treated as though they were imposed every month. That means that if a customer has a balance in the month in which the annual fee is assessed, even a small fee can cause the MAPR to exceed 36%.

In conclusion, banks provide access to safe, well-regulated, high-quality consumer credit products. Before Congress considers any extension of MLA rate caps a better understanding of the negative impact to credit access for consumers is needed.  Thank you for allowing me to testify today and I am happy to answer any of your questions.

To watch Pommerehn’s testimony before the Senate Banking Committee on Thursday, click HERE.

To read Pommerehn’s full written testimony submitted to the Senate Banking Committee, click HERE.

To learn more about the negative consequences of extending the military’s 36% interest rate cap to all consumers, click HERE.

To read the letter CBA and other trades sent last week to U.S. Senate Banking Committee Chairman Sherrod Brown and Ranking Member Pat Toomey, urging Congress to oppose any fee and interest rate cap legislation, click HERE.