As the financial services industry and federal regulators in Washington D.C. continue to debate the issue of interest rate (APR) de-regulation on short term, small dollar lending, the fight continues for advocates pushing the implementation of the 36 percent rate cap.
Their delay comes with a significant economic price – 12 million vulnerable Americans and their families await the outcome, living paycheck-to-paycheck while borrowing over $9 billion annually (Pew Trusts) from predatory payday lenders whose astronomical APRs reach as high as Texas’s 662. (CNBC)
Interest rate caps represent more than simply numbers; they place a mirror directly in front of society’s beliefs and joint conclusions on moral and ethical behaviors while paired with honest business interests and fundamental values. They reflect a consideration of the upper constraints of sustainable lending that does not destabilize the individual, families, or a society’s economic stability as a whole.
The proposed 36 percent APR has been shown to encourage more institutions to offer small dollar, short term credit and assist those 12 million borrowers to get out of the debt trap. And borrowers are indeed drowning. According to the Center for Responsible Lending, 76 percent of the total volume of predatory payday loans in the United States is due to “loan churning”, or taking out new loans to pay off the old ones. This is a purposely harmful and unsustainable business, pushing the financially-unstable borrower further into unhealthy debt with no workable detour. And now with the Consumer Financial Protection Bureau’s rollback of their own Payday Lending rule, financial institutions will, as of November 2020, be authorized to conduct automatic withdrawals from customer accounts after two consecutive attempts have failed. This will put customers at risk for overdraft fees while further hurting credit scores, in addition to providing no financial education for the customer in avoiding such circumstances in the future.
It’s a cascading snowball of financial distress for struggling American borrowers, and a 36 percent rate cap is a central part of the answer. Key consumer protection organizations and advocates are already on board with the common-sense rate cap.
The National Consumer Law Center (NCLC) conducted research on how a 36 percent APR has legitimacy as a price point. As far back at 2007, the Federal Deposit Insurance Corporation (FDIC) announced Small Dollar Loan Guidelines that encouraged lenders to offer loans at 36 percent or less. Then, in 2008, the agency followed up with a two-year pilot program designed to study the various small dollar loan products based on the 2007 results. The FDIC found the 36 percent and lower rates to be helpful to “meet the goal of safe and sound small dollar credit programs, which is to provide customers with credit that is both reasonably priced and profitable.”
In 2010, the National Credit Union Administration (NCUA) passed rules to allow federal credit unions to charge, as opposed to their current 18 percent usury cap, a 28 percent APR with a solo $20 application fee on short term installment loans ranging from $200 to $1000. The higher rate, the NCUA explained, would enable the credit unions to make money while the lower rates help borrowers find an affordable alternative lending option for the foreseeable future.
To top it off, in the last few years three separate federal agencies in addition to Congress have come back to the 36 percent APR proposal to formulate a responsible and fair small dollar loan framework. In fact, the Department of Defense has used the price point cap for small dollar loans since 2006, and considers the “social impact” with military families as including an understanding of “personal finances as an integral part of their quality of life.” For the quality of life and financial health of this great nation, the civilian sector deserves no less.
The bottom line is the 36 percent APR rate cap has proven to be the sweet spot. Already tested and used for over a decade, QCash Financial’s fully-automated digital financial wellness and small dollar lending platform substantiates a 36 percent APR is practical. It’s practical with the right automation, practical for the right underwriting criteria, and practical for credit unions dedicated to guiding struggling community members back onto the path to financial wellness.
If you’re one of those credit unions we urge you to go to our website and request a FREE demo here.