There are opposing views about the impact the Veterans and Consumers Fair Credit Act, a bipartisan bill that establishes a federal usury limit of 36%, will have if it passes the Senate.
The bill will extend to all consumers an interest-rate cap that currently applies to active-duty military service members. The goal is that the cap on fees and interest will help consumers by limiting what they pay on payday loans and other less-regulated, short-term credit, but the bill reduces access to credit and may hurt financially vulnerable consumers who rely on small-dollar lending services.
“These types of proposals are often based on a misunderstanding of how consumer credit works,” American Financial Services Association (AFSA) Senior Vice President Celia Winslow said in a press release. “We will work with senators and their staffs to ensure that legislation helps consumers receive credit they need and does not inflict serious economic harm, as this proposed legislation would. As our country begins to recover from the pandemic, the Senate should not pass legislation that would harm the very consumers this bill purports to help.”
If the new bill reduces access to credit, it will hurt the citizens of New Mexico more than other states. New Mexico’s payday lending rate is 15%, which is 5% higher than the national average of 10%.
Auto title loan usage rates are also higher than the national average, with a rate of 10% compared to 6%.
Late last month, the Senate Banking Committee held a hearing entitled Protecting Americans from Debt Traps by Extending the Military’s 36% Interest Rate Cap to Everyone. In order to fit under the rate cap, small-dollar lenders would have to restructure their loans to have longer terms, making them more affordable and manageable for borrowers.
Advocates for the Veterans and Consumers Fair Credit Act expect that this cap on fees and interest would help consumers, especially those with bad credit histories, by limiting what they pay on payday loans and other less-regulated, short-term credit.
The impact of the act would extend beyond payday lenders to the broader consumer credit market to cover affordable small dollar loans. So financially vulnerable consumers who are currently relying on credit cards and personal loans would be forced to find other solutions such as pawn shops, unregulated online lenders and the black market for their short-term financing needs.
