The heads of major US banks on Wednesday expressed their tentative support for a consumer credit interest rate cap, which would likely include payday and auto title loans.
During a Senate Banking, Housing, and Urban Affairs committee hearing on Wednesday, Senator Jack Reed, DR.I. asked the CEOs of Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, and Wells Fargo if they would support a 36 % Interest rate cap on consumer loans such as payday loans.
The bank bosses didn’t immediately reject the idea. “We absolutely do not charge that high interest rates on our customer base,” replied Jane Fraser, CEO of Citi, when asked by Sen. Reed. She added that Citi would love to take a look at the law just to make sure it doesn’t have any unintended consequences. “But we appreciate the spirit and intent behind it,” she said.
Chase, Goldman, and Wells Fargo CEOs agreed that they would like to review the final legislation, but were all open to the idea.
David Solomon, CEO of Goldman Sachs, said he wanted to make sure that “a substantially different interest rate environment” doesn’t lock out lending to anyone. “But in principle we think it’s good to have this transparency and look at it closely,” he said.
Brian Moynihan, CEO of Bank of America, said he also understood the “spirit” of the law.
Currently, 18 states, along with Washington DC, are setting a 36% interest rate cap on interest rates and fees on payday loans, according to the Center for Responsible Lending. But Senator Reed, along with Senator Sherrod Brown, D-Ohio, introduced legislation back in 2019 that would create a federal interest rate cap of 36% on consumer credit. Senator Brown told Reuters earlier this week that he intended to reintroduce the bill.
In the states that allow payday loans, borrowers can generally get one of these loans by visiting a lender and providing only valid ID, proof of income, and a bank account. Unlike a mortgage or car loan, no physical collateral is typically required and the amount borrowed is typically due two weeks later.
However, the high interest rates, which in some states reach an annual interest rate of over 600%, and the fast turnaround time can make these loans expensive and difficult to repay. Research by the Consumer Financial Protection Bureau found that almost one in four payday loans are loaned out nine or more times. It also takes about five months for borrowers to repay the loans and an average of $ 520 in funding costs, reports The Pew Charitable Trusts.
Big banks are not completely impartial when it comes to small loans. Although banks generally don’t offer small loans, this is changing. In 2018, the Office of the Currency Auditor gave banks the green light to start small dollar loan programs. Meanwhile, many payday lenders claim that a 36% interest rate cap could put them out of business and potentially give banks an advantage. If payday lenders cease operations due to a federal interest rate cap, it could force consumers to take advantage of banks that offer these loans.
In May 2020, the Federal Reserve issued “Loan Principles” for banks to offer responsible micro-credit. Several banks have already gotten into the business, including Bank of America. Other banks represented on the panel have not yet introduced small loan options.
Last fall, Bank of America launched a new small loan product called Balance Assist, which allows existing customers to borrow up to $ 500 in increments of $ 100 for a flat fee of $ 5. The annual interest rate on the product is between 5.99% and 29.76%, depending on the amount borrowed. Customers have three months to repay the loan in installments.
One of the reasons Bank of American developed the Balance Assist product was to help customers avoid the payday lenders, according to Moynihan on Wednesday.
While proponents claim that capping the interest rates on payday loans will keep consumers from getting over their heads with these traditionally expensive loans, opponents claim that these types of laws will decrease access to credit by putting lenders out of business with not Forcing sustainable interest rates and leaving people nowhere to turn when they are tight on cash.
Recent research suggests that consumers are best served by rules that require lenders to refuse borrowers new loans for a period of 30 days after taking out three consecutive payday loans, rather than imposing an interest rate cap.
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