AFSA’s Response to CDFI
Yesterday, AFSA responded to the Community Development Financial Institutions Fund’s questions regarding the small dollar loan program (SDL) application. The SDL application prohibits companies that provide “high-rate loans” from applying for the program. These loans are defined as “Loans that exceed the lower of the following two rates: (1) an all-inclusive 36% APR (using the methodology prescribed in 32 CFR 232.4 of the Military Lending Act (referred to as the Military Annual Percentage Rate [MAPR]; or (2) the interest rate limit as set by the state agency that oversees financial institutions in your state.”
AFSA’s comments strongly push back against defining high-interest loans as “prohibited.” As AFSA has consistently noted, including in our recent Consumer Credit Confidence Index survey, consumers are taking serious hits to their paychecks and wallets with ongoing inflation, layoffs, and economic uncertainty. There is similar uncertainty in the consumer credit industry, which helps generate trillions of dollars in economic activity each year. The availability of capital for all Americans is an ever present concern. Maligning a loan by labeling it as “prohibited” could decrease consumer confidence in a product that is highly regulated, supervised, and potentially the best choice for certain consumers. It also perpetuates bad policy.
The facts on rate caps of any kind are clear: they are unworkable and actually harm the consumers policymakers are trying to help, by limiting the types of credit tens of millions of Americans depend on more than ever. Several academic studies have proven that the data backs up concerns about rate caps tightening access to credit to the Americans who need it the most.
If the CDFI Fund continues to promulgate the argument that lending above a 36% MAPR is bad for the consumer, hard-working Americans could be steered away from access to safe and reliable credit that best fits their needs.
Further, the concept of “All-In APR” (also known as “Military APR”) expands the Truth in Lending Act (TILA) definition of Annual Percentage Rate (APR), to cover the cost of optional protection products that are unrelated to the cost of credit. When the novel definition of “All-In APR” is used for rate cap purposes, it has an exclusionary effect. It exacerbates financial inequalities by severely restricting the ability of higher-risk borrowers to access safe, affordable credit, without significantly affecting the better-off. AFSA believes that the desire to attach the cost of optional protection products to the APR rate carried by a loan stems from outdated understanding of the nature of these products, which are an invaluable enhancement to the financial capability of those that choose them.
- AFSA members offer insurance and other non-loan financial services that are entirely voluntary for our customers.
- Loan terms and conditions are offered without regard to whether credit insurance is purchased; it makes no sense, therefore, to consider the cost of non-loan products to be an additional finance charge.
- AFSA members’ optional protection products complement their loans, helping customers build financial stability, security, and resilience.
- Credit insurance is accessible, affordable, and popular with customers, who understand that it plays an important role in limiting their exposure to financial risk and the consequences of financial shock, including during the COVID-19 pandemic.
APR is a defined and well-understood term that has been the gold standard for comparing like credit products for decades. It is a useful tool for comparing like credit transactions by setting a single standard to determine the cost of credit in each proposed transaction. It was not intended to be (and is useless as) a tool to measure credit transactions that also include voluntary protection products that the consumer may choose to purchase.
AFSA appreciates the CDFI and Treasury’s mission to ensure that SDLP applicants engage in fair lending practices. The criteria for measuring whether an applicant is engaging in responsible lending practices should not be whether the applicant lends above a 36% MAPR, but: whether it offers transparent, fully amortized loans that are repaid in substantially equal payments. The removal of the prohibition against purported high-rate loans would help continue to foster diversity of types, activities and geography; support the growth and reach of CDFIs; protect the CDFI brand; minimize burden on CDFIs; and promote efficiency.
February 5th, 2025
