American Banker ran a piece last week highlighting the growing tensions between House Financial Services Committee Chairwoman Maxine Waters (D-CA) and high-ranking committee Democrats over a proposed law that would impose an interest rate cap on small-dollar loans. Reporter Neil Haggerty discusses how previously closed-door grievances were aired during a recent hearing on the bill and how last year “Waters was unable to build enough support to schedule the legislation for a committee vote.” Haggerty also details the opposition of Rep. Brad Sherman (D-CA), the influential Chairman of the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets.
In addition to Sherman, one can assume that Chairman of the Subcommittee on Consumer Protection and Financial Institutions Gregory Meeks (D-NY) would also be against the interest rate cap, given he cosigned legislation in 2017 that would have reinforced the “valid-when-made” legal doctrine, with respect to interest rates.
While the hearing revealed the inner-party conflict over the legislation, this divide was further demonstrated by Democratic witnesses who contradicted their written testimony in support of a rate cap by seeming to question the merits of such a measure.
If you tune into the hearing livestream at 2:08:48, you’ll hear Representative Al Green (D-AL) ask Mercatus Center Senior Fellow Brian Knight how lawmakers can confront cyclical consumer indebtedness. Rather than let Knight answer, Green turns to Ohio State University Law Professor Creola Johnson, who replies and seems to imply that enhanced regulation of bank partnerships could be a viable alternative to an interest rate cap. This goes against her written testimony where she asserts that “payday loans are predatory” and argues there is a paramount need for Congress to “establish a 36 percent nationwide rate cap for consumer loans.”
Earlier in the hearing, while Green was still questioning Knight, Graciela Aponte-Diaz of the Center for Responsible Lending (CRL) interrupted (at around 2:07:46) to argue that a 36 percent interest rate cap would even be “generous” to small-dollar lenders. It’s interesting that Aponte-Diaz would call a 36 percent rate cap “generous” when CRL has insisted on portraying the small-dollar loan industry as inherently predatory. If payday lenders are loan sharks who prey on poor, uneducated consumers, how could a “generous” 36 percent rate cap go far enough in ending their exploitative practices?
The testimony provided by these witnesses show the arbitrary nature of an interest rate cap and how its proponents struggle to substantiate their positions without also undermining them. While supporters of a 36 percent rate cap cling to that exact percentage, few seem to realize that this number comes from statute under the Military Lending Act where Congress seemingly pulled 36 percent out of thin air and with no real basis.
Despite the efforts of Chairman Waters to quickly push this bill through committee, it appears she has her work cut out for her.
You can learn more about why regulation of bank partnerships and interest rate caps are dangerous for consumers here.