AFSA Testimony in Senate Hearing on Rate Caps
On Thursday, July 29 2021, AFSA President & CEO Bill Himpler testified before the Senate Committee on Banking, Housing & Urban Affairs in a hearing entitled “Protecting Americans from Debt by Extending the Military’s 36% Interest Rate Cap to Everyone.” You can also view the written testimony, with full sourcing and appendices.
Prepared Testimony of Bill Himpler
President & CEO, American Financial Services Association
Senate Banking, Housing and Urban Affairs Committee
Thursday, July 29, 2021
Chairman Brown, Ranking Member Toomey, and members of the committee, thank you for the opportunity to discuss how traditional installment lenders offer responsible small dollar credit to hardworking Americans.
A 2019 Federal Reserve study found many adults, particularly people of color, may not withstand even small financial disruptions. Nearly 40 percent of adults reported difficulty covering an unexpected four-hundred-dollar expense.
For more than a century traditional installment lenders have served such customers with safe and affordable loans. Consumer finance companies make more than three-times as many personal loans to subprime borrowers as credit unions, which are cited as a small-dollar credit solution. In fact CUNA president Jim Nussle recently said that rate caps will reduce such credit access.
Congress passed the Community Reinvestment Act to encourage financial institutions to serve the underserved neighborhoods you’re concerned with. AFSA members are in those neighborhoods, and with 9 of 10 customers performing on their loans, we ARE helping.
This credit lifeline would be dramatically hindered under a thirty six percent rate cap on covered consumer loans. Nearly one in three Americans do not have a prime or excellent credit score. 53 million adults have thin or no credit files. When reputable small-dollar lenders cannot serve underbanked or subprime consumers, the consumers are left to turn to unregulated or illegal predatory lenders.
For those who believe such rate caps are helpful to consumers, a recent study showed the Military Lending Act’s 36 percent rate cap is not.
The 2020 survey by the National Foundation for Credit Counseling found that active duty servicemembers were more than twice as likely to take out a cash advance or payday loan in 2020 than in 2019. They said THEY used these loans because there were few other options available.
As the National Commission on Consumer Finance noted, as a CFPB credit taskforce stated, as the Federal Reserve, banks, non-bank lenders, and credit unions noted, APR caps at thirty six percent or below are unworkable for reputable lending institutions.
Traditional installment loans help hardworking Americans cover necessities or unexpected expenses. Installment loans are transparent, with easy-to-understand terms, fixed rates, equal payments, no prepayment penalties, and defined payoff dates averaging between 12 to 18 months.
The average loan amount is two thousand dollars, with no balloon payment or hidden cost. Lenders determine a borrower’s ability to repay, and repayment history is reported to credit bureaus, which gives consumers the opportunity to build or strengthen their credit history.
For such small-dollar loans the quality, affordability, and soundness of the loan is best judged by its length and monthly payment, not its interest rate. Annual percentage rates are a function of time, rather than a measure of the cost of a loan. And this is the most important point.
Say you borrow one hundred dollars and are charged one dollar in interest. If you repay the loan in one year, the APR is one percent. Repay it in a month, the rate is twelve percent. If you repay the loan tomorrow, the APR is three hundred sixty five percent. Same dollar in interest, vastly different APRs.
Analysis based on a Fed study found that with a thirty six percent rate cap, consumers would be unable to obtain a loan of less than three thousand dollars. They will be forced to borrow a larger amount than they need, with higher costs and longer repayment periods despite a lower APR. That is, if they even qualify for the larger loan.
Access to financial services is a cornerstone of the American way of life; for many consumers such access enables opportunities that might otherwise be out of reach.
Credit access should not be a privilege reserved for the elite. When someone who is underbanked, has less than perfect credit, or does not have access to a needed loan, it is not a consumer-protection victory. It is a civil rights loss.
All consumers deserve access to safe and reliable credit, and AFSA and its members stand ready to work with you to ensure that economic opportunity is accessible for all.
July 29th, 2021 by Dan Bucherer