Leaders of major U.S. banks on Wednesday expressed interim support for a cap on federal interest rates on consumer loans, which would likely include payday loans and auto securities.
During a hearing held by the Senate Banking, Housing and Urban Affairs Committee on Wednesday, Senator Jack Reed, DR.I., asked CEOs of Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Wells Fargo if they would support a 36% cap on interest rates on consumer loans like payday loans.
The bank’s CEOs did not immediately dismiss the idea. “We absolutely do not charge such high interest rates for our customers,” Citi CEO Jane Fraser said in response to Senator Reed’s question. She added that Citi would like to take a look at the law, just to make sure there aren’t any unintended consequences. âBut we appreciate the spirit and the underlying intention,â she said.
The CEOs of Chase, Goldman and Wells Fargo have agreed they would like to review any final legislation, but all have expressed openness to the idea.
David Solomon, CEO of Goldman Sachs, said he wanted to make sure that a “significantly different interest rate environment” wouldn’t prevent lending to anyone. “But in principle, we think it’s good to have that transparency and to look carefully at that,” he said.
Brian Moynihan, CEO of Bank of America, said he also understands “the spirit” of the law.
Currently, 18 states, as well as Washington DC, have a 36% cap on interest rates and fees for payday loans, according to the Center for Responsible Lending. But Senator Reed, along with Senator Sherrod Brown, D-Ohio, already introduced legislation in 2019 that would create a 36% federal interest rate cap on consumer loans. Senator Brown told Reuters earlier this week that he plans to reintroduce the bill.
In states that allow payday loans, borrowers can usually take out one of these loans by going to a lender and simply providing valid ID, proof of income, and a bank account. Unlike a mortgage or car loan, no physical collateral is usually required and the borrowed amount is usually due two weeks later.
Yet high interest rates, which exceed 600% APR in some states, and short lead times can make these loans expensive and difficult to repay. Research by the Consumer Financial Protection Bureau has found that almost one in four payday loans are re-borrowed nine or more times. Additionally, borrowers take about five months to repay loans and cost them an average of $ 520 in finance charges, reports The Pew Charitable Trusts.
Big banks are not completely unbiased about small loans. Although banks generally do not provide small loans, the situation is changing. In 2018, the Office of the Comptroller of the Currency gave the green light to banks to launch small dollar lending programs. Meanwhile, many payday lenders argue that a 36% rate cap could bankrupt them, potentially giving banks an advantage. If payday lenders were to stop operating due to a federal rate cap, it could force consumers to use the banks offering these loans.
In May 2020, the Federal Reserve released âLending Principlesâ for banks to offer responsible small dollar lending. Several banks have already embarked on the business, including Bank of America. The other banks represented in the panel have not yet implemented small loan options.
Last fall, Bank of America launched a new low dollar loan product called Balance Assist, which allows existing customers to borrow up to $ 500, in $ 100 increments, for a fixed fee of $ 5. The product’s APR ranges from 5.99% to 29.76%, depending on the amount borrowed, and customers have three months to repay the loan in installments.
One of the reasons Bank of American created the Balance Assist product, Moynihan said Wednesday, was to help clients avoid payday lenders.
While advocates argue that the interest rate caps on payday loans keep consumers from getting carried away by these traditionally expensive loans, opponents argue that these types of laws will reduce access to credit by forcing lenders to shutting down with unsustainable rates, leaving people nowhere. turn around when they are strapped for cash.
Recent research argues that consumers may be better served by rules that require lenders to deny borrowers any new loans for a period of 30 days after taking out three consecutive payday loans, rather than putting a cap on them. interest rate.
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