The objectives of the bipartisan, bicameral legislation, Jobs and Neighborhood Investment Act, are laudable. These bills, H.R. 7709 and S. 4255, direct billions in new investments to help low-income and minority communities withstand this unprecedented economic downturn and emerge stronger with increased access to capital and new economic opportunities.

As the cosponsors of the legislation explain, the toll of the novel coronavirus is falling disproportionately on the most vulnerable and financially constrained households in the economy, putting many low-income and minority neighborhoods at risk of sustained economic damage that will last far beyond the current crisis.

These bills would provide over $14 billion to certain community development financial institutions (CDFIs) and Minority Depository Institutions (MDIs) with capital, liquidity, and operational capacity. The legislation is intended to expand the flow of credit into underserved communities, providing affordable access to credit for lower-income borrowers and helping small businesses stay afloat.

Interestingly, though, both the House and the Senate bills include a provision directly contrary to the goal of providing affordable access to credit. To take advantage of the new funding programs, a CDFI or MDI must attest that it “does not own, service, or offer any financial products at an annual percentage rate of more than 36 percent interest,” as defined in the Military Lending Act (MLA).

A prohibition on lending below 36 percent APR will cut off access to small-dollar loans. Federal Reserve economists recently found that, “A loan amount of $2,530 is necessary to break even at 36 percent.” (That’s at a Truth-in-Lending Act APR, not the “all-in” APR included in the MLA. The break-even loan amount for a 36 percent “all-in” APR would be even higher.)

The same Federal Reserve study concluded, “The findings suggest that despite the many changes in consumer credit markets, a large share of costs of small personal loans at consumer finance companies remain fixed. … With substantial fixed costs, high interest rates are necessary to provide sufficient revenue to cover the costs of providing such loans. 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 strongly supports expanding individuals’ access to credit. We appreciate Senator Mark Warner (D-VA) and Congressman Gregory Meeks (D-NY) for historically advocating to ensure responsible lending remains available to everyone. However,  to secure affordable access to credit for lower-income borrowers and underserved communities, members of Congress should remove the arbitrary rate cap provision from H.R. 7709 and S. 4255, the Jobs and Neighborhood Investment Act.