U.S. Senate Bill to Cap Interest Rates on All Consumer Loans; Targets Payday Lending

In an effort to effectively end the high interest rates charged to consumers who take out short-term – or payday – loans, a group of U.S. Senate Democrats Tuesday introduced a bill that would cap annual interest rates at 36 percent for all consumer credit transactions.

The bill, S.673, is sponsored by Dick Durbin (D-Ill.), the Senate’s Majority Whip. The bill has four additional co-sponsors: Sen. Jeff Merkley (D-Ore.), Richard Blumenthal (D-Conn.), Sheldon Whitehouse (D-R.I.), and Barbara Boxer (D-Calif.).

“As we climb out of the worst recession in a generation, many working families continue to struggle, Sen. Durbin said in a statement. “For some, payday lenders offer a quick way to make ends meet, but often with devastating consequences. With interest rates of two and three hundred percent of value of the loan, these excessive rates and hidden fees have crippling effects on those who can afford it least. Capping interest rates and fees for consumers is a fair and sensible thing to do to protect working families during our economic recovery.”

The effective annual percentage rate (APR) of interest on a payday loan can quickly soar because the loan’s interest is calculated on a weekly, or in some cases daily, basis. After pushback from consumer rights groups and state regulators, many short-term lenders began charging a flat origination fee instead of interest. But the fees result in very high effective APRs when calculated using typical interest methods.

For example, if a payday lender charges a $15 fee on a $100 loan with a term of two weeks, the APR will be 390 percent, even though the consumer is paying 15 percent interest for only two weeks.

Some states have already cracked down on payday lending, legislating the high-interest loans out of practice in a similar fashion to Durbin’s bill. And on the federal level, there is already a 36 percent cap on short-term, auto title, and refund anticipation loans made to members of the U.S. military.

The bill would apply the cap to all consumer credit transactions, including mortgages, car loans, credit cards, overdraft loans, car title loans, refund anticipation loans, and payday loans.

The sponsors see little impact on most credit products since annual interest rates on large common loans – mortgages, car loans, and credit cards – rarely, if ever, exceed 36 percent.

Logistically, S.673 – titled “Protecting Consumers from Unreasonable Credit Rates Act” – amends the Truth in Lending Act (TILA) to establish a national usury rate for consumer credit transactions.

The bill was introduced and read twice Tuesday before being referred to the Senate Committee on Banking, Housing, and Urban Affairs, of which Merkley is a member.