The Senate Banking Committee holds a hearing about interest rate caps on July 29. The title is ominous: “Protecting Americans from Debt Traps by Extending the Military’s 36% Interest Rate Cap to Everyone.” The Military Lending Act (MLA) is in place to protect service people from predatory lending, primarily focused on PayDay lending.
While the Committee’s announcement does not mention the facts about interest rates and goes for an emotional, consumer-attractive title, it fails to consider the impact to consumers if interest rate caps are imposed.
First, a simple fact about credit card rates, according to Federal Reserve data.
The average credit card interest rate in the United States is 15.91% lower than the last two consecutive quarters and significantly lower than the average for 2018, 2019, and 2020, where the average rate was 16.04%, 16.98%, and 16.28%, respectively.
This hearing is by no means not the first attempt to control interest rates, as you can see here and here. However, the move sounds innocent, and by linking it to guidelines for military lending, it sounds like it is in the public good, but it will contract consumer lending.
The issue is not that 36% interest rates should exist in credit cards. The skyrocketing rate rarely happens, except in the case of default interest rates. The issue is should the government control consumer interest rates.
First of all, the U.S. government is probably the last place to look for insight into debt management. According to TruthInAccounting.Org, the U.S. government is bankrupt many times over. Using data from the annual financial State of the Union report, the Federal Government has 5.95 trillion in assets and $129.06 trillion in liabilities., including $21.1 trillion in publicly held debt. That’s a lot of zeros.
We are not even talking about the $1.71 trillion student loan debt problem in America. 11.1% of those student loans are 90+ days in default. Lending Tree says that there only $14.7 billion of those loans are in repayment status. There is another $113.4 billion in deferment and $887.4 billion in forbearance.
When it comes to consumer credit management, asking the federal government to weigh in seems a little out of whack. I am not the only one with this view. Consider a recent letter sent by seven top bank industry trade groups: American Bankers Association, Bank Policy Institute, Consumer Bankers Association, Credit Union National Association, Independent Community Bankers of America, Mid-Size Bank Coalition of America, and National Association of Federally-Insured Credit Unions National Bankers Association. The organizations not only cite mathematical errors in the military rate calculation, but they also summarize their view as follows:
- We urge you to oppose pending fee and interest rate cap legislation because it will reduce access to credit for millions of consumers, particularly subprime borrowers who rely on affordable small-dollar loans, credit cards, and other depository institution products for short-term financing needs. Fee and interest rate caps will also discourage development of innovative products, especially those designed for the under-served market.
Ballard Spahr, a top U.S. law firm, summarizes the trade group’s strategy.
- They point out that the result will be to reduce access to credit and force many consumers who currently rely on credit cards or personal loans “to turn elsewhere for short-term financing needs, including pawn shops, online lenders—or worse—loan sharks, unregulated online lenders, and the black market.”
Regulating lending parameters is an unsound move unless the goal is to contract lending.
Let the market decide. With an average interest rate <16%, few cardholders have rates even near 36% under normal conditions. But the minute Congress sets its sights on lending parameters, you will see lending contract at a massive scale. And, I’d say with almost $6 trillion in assets and $130 in liabilities, you would be asking the wrong people for advice.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group