AFSA Supports Access to Credit in Proposed CDFI Application
The American Financial Services Association (AFSA) emphasized the importance of preserving access to credit in response to the Department of Treasury (Treasury) and Community Development Financial Institutions’ (CDFI) Fund revised CDFI certification application proposed by the respective agencies. CDFIs are private financial institutions which offer affordable financial products and services to low-income and disadvantaged communities.
AFSA strongly supports the agencies’ efforts to ensure that CDFI applicants engage in responsible lending practices, but writes that the criteria for measuring responsible lending practices should not be whether the applicant lends above a 36% Military Annual Percentage Rate (MAPR).
In its letter to Treasury and the CDFI Fund, AFSA cited a recent Federal Reserve study showing that implementing a 36% MAPR cap would reduce access to credit by the very borrowers CDFIs should be serving. Specifically, the study found that a loan amount of $2,530 is necessary to break even at a 36% Truth in Lending Act (TILA) APR. For a loan to be made profitably with a total cost of credit of 36%, the loan would have to be between $3,500 – $4,000. The authors concluded, “If small loan revenue is constrained by rate ceilings, only large loans will be provided. Consumers who need a small loan or only qualify for a small loan would not be served.”
AFSA instead believes that the criteria for measuring responsible lending practices should be whether the lender offers transparent, fully-amortized loans that are repaid in substantially equal payments, whether it evaluates a borrower’s ability to repay, whether it reports to a credit bureau, and whether it requires a balloon payment or the use of ACH.
November 11th, 2020 by Dan Bucherer