New Legislation in House, Senate Would Cap Consumer Loans at 36%, Crippling the IndustryNew federal legislation introduced in the House and Senate would place a 36% annual percentage rate cap on nearly all consumer loans, potentially killing the small dollar consumer lending industry.

Last month, Congressmen Jesús G. “Chuy” García (D-IL) and Glen Grothman (R-WI) introduced H.R. 5050, the Veterans and Consumers Fair Credit Act. The bill proposes to limit the finance charge on consumer loans to 36%. In essence, the bill would extend the rate cap from the Military Lending Act (MLA) — currently applicable only to active duty servicemembers and their families — to loans made to all consumers.

The MLA was passed in 2006 in response to a perceived need to protect military personnel from certain predatory lending practices. According to the Congressional Research Service, this was necessary because financial matters affected an individual servicemember’s personal readiness and could lead to revocations of security clearances and to eventual separation from the military. And from the Department of Defense’s (DOD) broader perspective, the loss of a security clearance or the separation of a servicemember can create critical capability gaps for deployed units, resulting in additional costs to recruit and train replacements.

The MLA places limits on the terms of consumer credit extended to active duty servicemembers and their dependents, among other things. Under the MLA, creditors may not exceed an annual percentage rate (APR) of 36% on consumer credit. Initially, the DOD limited the application of the MLA to a few closed-end credit products (e.g., payday, auto-title, and tax refund anticipation loans). But in 2015, the DOD expanded the application of the MLA to nearly all consumer loans, including open-end loans (such as credit cards). Currently, the MLA applies to all credit that is subject to the disclosure requirements of the Truth in Lending Act (TILA), except for mortgages and auto-secured purchase loans.

H.R. 5050 would extend the MLA’s 36% APR cap to loans offered to all consumers, not just active duty servicemembers and their families. The bill also employs MLA’s method for calculating APR, which is different than the APR calculation for TILA disclosures and results in a much higher number. Under the MLA (and H.R. 5050), the APR includes all additional fees and fees for ancillary products. Specifically, fees for credit insurance and debt protection are included in the calculation of APR, regardless of whether the product is optional. However, bona fide credit card fees, other than credit insurance and debt protection fees, are excluded from the calculation of APR.

H.R. 5050 would be implemented by rules from the Consumer Financial Protection Bureau (CFPB), in consultation with the DOD. In fact, the bill requires that the CFPB’s rules be consistent with the DOD’s rules for the MLA and provide as much protection to general consumers as the DOD’s rules provide to servicemembers.

The 36% cap would apply to credit extended after a “compliance date” set by the CFPB or 18 months after the passage of the bill, whichever is earlier. The bill would then be enforced by the CFPB and by state attorneys general and regulators.

Additionally, a companion bill, S. 2833, has been introduced in the Senate by Senators Jeff Merkley (D-OR), Jack Reed (D-RI), Sherrod Brown (D-OH), and Chris Van Hollen (D-MD). The Senate bill is essentially identical to the House bill.

Up to this point, federal laws governing consumer financial products primarily sought to ensure that consumers received enough information about the loan products they were obtaining to make an informed choice. Such laws achieved this end by requiring disclosures and prohibiting unfair, deceptive, or abusive acts or practices. And, except for particular loan types with unique issues (such as federally related mortgages), federal law left it up to states to determine the substantive rules that would govern loans, including rate caps. Indeed, the principal of allowing states to regulate rates caps was so protected that it was a part of the Dodd-Frank Act. It specifically prohibits the CFPB from setting rate caps for any consumer loans, including small dollar loans.

Usury, thus, has traditionally been a state law issue. Many states, responding to the concerns of their residents, have already customized their laws and licensing systems to balance the needs of consumers for credit and for protection from predatory loans in their state. H.R. 5050 appears to represent an expansive growth of federal regulation in an area left traditionally to the states. The bill would prescribe a one-size-fits-all approach and would seek to override the often carefully balanced laws that states have already put in place.

A 36% APR cap would severely limit consumer access to credit, according to many industry lenders. The cost of credit is often higher in small dollar lending due to the higher risk of consumer default with unsecured small dollar loans. The restrictions on consumer loans mandated by the MLA were aimed at a particular problem applicable only to active duty servicemembers and their families — i.e., to ensure that servicemembers could perform their military duties when they took out loans and would not be penalized during this very unusual time of being on active duty. The question must be asked whether such concerns apply to general consumers, at the expense of severely limiting access to credit. In many ways, this analysis shows that a possible extension of the MLA would be inappropriate. Industry participants, however, should remain vigilant in assessing their own risk as a result of this proposal.

Given the numerous federal and state legislative and regulatory efforts to limit small dollar lending, it is important for companies to engage in the political process. Our Governmental Affairs Practice Group is active and has significant experience working on issues of concern to the industry. If you would like to learn more about how you can engage in the political process, please contact David Stewart.

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Photo of Jennifer L. Galloway Jennifer L. Galloway

Jennifer Galloway’s practice is dedicated to helping financial services clients successfully navigate increasingly complex regulatory and business environments. She is co-chair of Bradley’s Small Dollar and Unsecured Consumer Lending team and focuses on consumer financial services laws and regulations affecting banks, non-depository banks…

Jennifer Galloway’s practice is dedicated to helping financial services clients successfully navigate increasingly complex regulatory and business environments. She is co-chair of Bradley’s Small Dollar and Unsecured Consumer Lending team and focuses on consumer financial services laws and regulations affecting banks, non-depository banks and other financial institutions. Jennifer provides skilled regulatory guidance and detailed knowledge of the laws impacting both traditional and innovative lenders in the consumer financial services market, with considerable experience in online consumer lending. Her compliance work includes assisting clients with developing, implementing and maintaining compliance management systems, performing internal compliance audits for clients, preparing clients for outside audits, as well as preparing related lending documents and disclosures. She also counsels financial services companies regarding CFPB preparedness, implementation and operational strategies for complying with the CFPB’s regulations, and assists in defending regulatory enforcement actions.

Photo of J. David Stewart III J. David Stewart III

David Stewart regularly represents clients before the executive and legislative branches in Washington, D.C., and Montgomery, Alabama, and also advises clients on federal and state campaign finance, lobbying and ethics laws. He got his start in politics working in the United States Senate…

David Stewart regularly represents clients before the executive and legislative branches in Washington, D.C., and Montgomery, Alabama, and also advises clients on federal and state campaign finance, lobbying and ethics laws. He got his start in politics working in the United States Senate in Washington, D.C. before attending the University of Virginia Law School. After graduating from law school in 2000, David returned home to Birmingham to join Bradley’s Governmental Affairs Practice Group.

Photo of Andrew J. Narod Andrew J. Narod

Andrew Narod is an experienced litigator who represents bank and non-bank financial services institutions and other types of businesses in class-action litigation, complex commercial litigation, and other high-profile litigation disputes nationwide. His clients entrust him to navigate some of their most sensitive litigation…

Andrew Narod is an experienced litigator who represents bank and non-bank financial services institutions and other types of businesses in class-action litigation, complex commercial litigation, and other high-profile litigation disputes nationwide. His clients entrust him to navigate some of their most sensitive litigation matters in some of the most difficult venues in the country.

Photo of Michael M. Aphibal Michael M. Aphibal

Michael Aphibal advises on regulatory issues affecting financial institutions, including banks, non-bank lenders, and insurance agencies. His work primarily focuses on issues surrounding the offering of consumer financial products and services, including licensing, employee compensation, loan origination and servicing, customer information sharing and…

Michael Aphibal advises on regulatory issues affecting financial institutions, including banks, non-bank lenders, and insurance agencies. His work primarily focuses on issues surrounding the offering of consumer financial products and services, including licensing, employee compensation, loan origination and servicing, customer information sharing and privacy, consumer disclosures, telemarketing, and the sale of add-on products, particularly debt protection products.