Leading Financial Groups Voice Opposition to Legislation Seeking to Impose a National Fee and Interest Cap on Consumer Loans

September 27, 2023

WASHINGTON, D.C. – In a new letter sent today, seven leading financial groups representing virtually all banks voiced their opposition to a proposal from Senator Jack Reed (D-R.I.) that would reduce access to credit within the well-regulated banking system through the imposition of a national fee and interest rate cap of 36 percent.

As outlined in the letter, Sen. Reed’s proposal would actually harm consumers who want to obtain credit: 

“Small dollar loans, credit cards, and other forms of short-term credit are critical for helping consumers meet emergency expenses, disruptions in pay, and misalignments in the timing of their expenses and income. The proposed 36 percent fee and interest cap would make it more difficult for many consumers to obtain credit, thereby harming the very consumers the legislation seeks to protect.”

While proponents believe a cap on fees and interest would help consumers, especially subprime borrowers, research shows it will also affect small dollar loans, credit cards, and other products offered within the well-regulated banking system. As a result, the groups go on to say:

“Many consumers who currently rely on credit cards or personal loans would be forced to turn elsewhere for short term financing needs, including pawn shops, or worse– loan sharks, unregulated online lenders, and the black market. […] The available evidence confirms that fee and interest rate caps reduce access to credit, especially for those with no or troubled credit history.”

More banks now offer more small dollar loans as a safety net option than ever before, and many consumers benefit from credit card rewards and cash back features, but the introduction of the rate cap threatens to eliminate these programs. As the group points out, these implications would harm underserved communities most:

“[While] some larger banks have introduced small dollar products, the application of artificially low APR limits to small dollar products would preclude many from being able to establish available small dollar products to meet consumer needs. [A] cap will also inhibit innovative credit cards with non-credit features designed to attract underserved groups because even a nominal annual fee will result in an all-in rate that exceeds 36 percent.”

A narrow focus on annual percentage rates isn’t always an appropriate measure of the cost of credit, especially when considering factors such as one-time annual fees or short-term products. For example:

“[F]or a three-month $500 loan, costs would generally amount to $55, which if charged to the consumer would equate to a 44 percent APR. Such a rate would be prohibited under the legislation.”

As representatives of community banks and both large and small financial institutions that provide small dollar products and credit cards, the groups concluded by reiterating a commitment to providing credit for millions of consumers and helping those who need it most:

“We urge opposition to this fee and interest rate cap proposal because it will reduce access to credit for millions of consumers, particularly subprime borrowers who rely on affordable small dollar loans, credit cards, and other products for short term financing needs.”

To read the full letter, click HERE.