The American Bankers Association (ABA) appreciates the opportunity to submit a statement for the record for the hearing titled “Rent‐A‐Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps.”
We share your concern that consumers be protected when they apply for and are approved for credit. It is our belief that consumers are best protected when credit products are provided through channels associated with a chartered, regulated bank.
Some non‐banks are using new platforms to essentially deceive and in extreme cases, defraud, consumers. We are also concerned about the potential emergence of standalone “big tech” providers of financial services who use regulatory arbitrage to achieve advantages over banks by neglecting to observe bank‐level standards around data protection, privacy, consumer protections, and safety and soundness.
In contrast, bank partnerships allow other sectors, such as retailers, to serve their customers better. This is one of the reasons our Nation has maintained a longstanding doctrine of separating banking and commercial activities. The heavily‐regulated banking industry can provide services to others in a manner that improves the condition of all parties. We believe that public policy risks are made more acute when lenders are not associated with a bank.
As recently as last week, ABA filed comments with the Financial Technology Task Force of this Committee stating clear opposition to lightly‐regulated non‐banks gaining direct access to the Nation’s core payment systems operated by the Federal Reserve. In the same comments, we provided current examples of regulatory hurdles such as the Durbin Amendment which prevent many underbanked Americans from accessing basic banking services from reputable financial services companies.
But some overly‐aggressive proposals to prevent abuses by non‐banks would do more harm than good to current bank customers. Specifically, we know from years of accumulated observations of credit markets that when nearly‐universally discredited restraints like price caps are imposed, consumers lose access to high‐quality credit through the regulated financial system and are forced to seek the service of inferior, unregulated lenders on unconscionable terms.
Legislation to cap lending prices is not as advertised by some advocates: it is more than just “interest rate caps” and would undermine basic presumptions about how consumer credit markets operate. H.R. 5050 (the Veterans and Consumers Fair Credit Act), for instance, mandates an all‐in ceiling that will impact loans with interest rates below the rate stated in the legislative text. In addition to not containing an immediately transparent description of the loans affected, provisions in the bill also call into question the long‐standing doctrine of preemption that has allowed banks to serve customers nationwide with innovative products.
If enacted, these kinds of restrictions would be a step backwards into what the late Nobel Laureate Paul A. Samuelson referred to (in 1969, at the advent of the modern era of finance) “the hodgepodge that has hitherto characterized our history.”4 As new data presented in these comments demonstrate, H.R. 5050 and similar bills to cap charges associated with consumer loans likely would significantly reduce access to good mainstream financial products such as credit cards. Supporters of this bill admitted as much when they suggested that the consequences of the bill could be ameliorated by consumers visiting pawn shops or borrowing money from friends. These proposals do not represent progress for consumers.
Furthermore, these bills were introduced without rigorous investigation into their effects on the consumer credit market, nor calculations about their impact on consumer welfare. In the absence of cost estimates or other forecasts, we urge caution about such dramatic one‐size‐fits‐all proposals. Given that the consensus of economic science is that such proposals are harmful, caution is even more prudent. Fortunately, as embodied in decades of accumulated law, consumer protection is possible through means other than arbitrary price caps. Notably, landmark financial regulations of the modern era such as the Dodd‐Frank Act eschewed the use of consumer credit price caps.
Consumers face a variety of credit choices in the formal and informal loan markets. The quality of these choices differs vastly. Consumers of substantial means are most likely to be able to finance their spending from their own savings and investments, and if they are not, they are also most likely to have access to funds from family, friends, or associates, lent on friendly terms. They are unlikely to be familiar with options such as payday loans, pawnshops, auto title loans, or even less attractive options in the black market.
For some Americans who may require the convenience of unsecured credit, a policy decision that effectively revokes their access to credit (without any compensating replacement) can cause a significant disruption to life. A family that does not qualify for the lowest interest rates or know someone willing to lend to them on short notice and good terms is left to make hard choices when the unexpected happens. A car that breaks down may go unfixed and a job unworked, or a home unheated when a boiler fails. When people in need cannot meet their credit needs through financial institutions, the need does not go away; instead, people are driven to “informal” sources.
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