Joint Trades Letter re H.R. 3549 Predatory Lending Elimination Act

December 19, 2023   

The Honorable Jack Reed   
United States Senate   
728 Hart Senate Office Building 
Washington DC 2050     

Re: Predatory Lending Elimination Act   

Dear Senator Reed:     

The undersigned trade associations, representing financial institutions that serve hundreds of millions of American consumers, write in opposition to S. 3549, the “Predatory Lending Elimination Act” that would impose a limitation to fees and interest charged on consumer loans through an all-in national rate cap of 36 percent.

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. Congress should reject these legislative measures.

Proponents believe a cap on fees and interest would help consumers, especially subprime borrowers who have less than perfect credit histories, by limiting what they pay on payday loans and other less regulated short-term credit. In reality, its impact would extend far beyond payday lenders to the broader consumer credit market to cover affordable small dollar loans that financial institutions are being encouraged to offer, along with credit cards, personal loans, and overdraft lines of credit. As a result, 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.

A 36 percent annual percentage rate (APR) cap, however calculated, will mean financial institutions will be unable to profitably offer affordable small dollar loans to consumers. For a loan product to be sustainable, lenders must be able to recover costs. Costs include not only the cost of funds availability, but also costs related to compliance, customer service, IT, underwriting, administration, defaults, and, most notably– losses. Furthermore, the terms of consumer loans are often much less than a year, and the APR is an inappropriate and misleading way to measure the cost of a short-term loan. For example, for 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.

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