Senators Preview Legislation to Undermine Free Market Short-term Lending

According to recent press reports, Senator Sherrod Brown, Chair of the Senate Banking Committee, is preparing to reintroduce harmful price control legislation that would restrict access to short-term loans. While official details remain murky, it is expected that his bill will mirror the so-called “Veterans and Consumers Fair Credit Act (VCFCA),” which prohibits short-term lenders from charging an interest rate above a certain percentage. If enacted, this misguided legislation would put the federal government between consenting borrowers and lenders, and have disastrous unintended consequences across the economy. 

While the actual legislative text has yet to be announced, it is likely to be similar to the VCFCA, which was approved on a party line vote in  the House Financial Services Committee last year. At the time, NTU submitted a letter to the Committee highlighting our opposition to the bill, noting “Congress has a long history of imposing regulations intended to help low-income Americans that end up causing economic pain – and they are poised to do so once again with short-term lending.” Should Chairman Brown plan on voting the VCFCA out of the Senate Banking Committee, NTU will be on the frontlines fighting this disastrous legislation.

Like most government-imposed price controls, the VCFCA is a bill that lacks sound economic reasoning. Specifically, the legislation states that no consumer loan can be made if the Annual Percentage Rate (APR) of a loan exceeds 36 percent. However, using APR as the rationale to cap interest rates is entirely arbitrary and economically flawed. The APR is simply the rate of interest a borrower will pay over the course of a year due to compounding, but short-term consumer loans are rarely outstanding for an entire year. These loans typically act as a cash advance that are paid back in full at the borrower’s next pay period. So while the loans may indeed carry a high APR, the vast majority of loans are repaid in a matter of weeks or months, not extended for an entire year.

Interest rates are incredibly important for lenders, as they allow them to price in all their fixed and unforeseen costs. Factors such as the lender’s costs and risks and consumer demand for credit all affect how expensive or inexpensive credit will be. Any short-term interest rate includes a number of important factors, such as the risk of lending to potentially credit-unworthy borrowers, chance of default, and fixed costs of operating a business.

Moreover, Pew Charitable Trusts notes, “69% used short-term loans to cover a recurring expense, such as utilities, credit card bills, rent or mortgage payments, or food; and 16% dealt with an unexpected expense, such as a car repair or emergency medical expense.” Small-dollar credit products help many people deal with everyday household expenses and unforeseen emergencies that can happen to anyone from any income level.

Short-term loans are important financial tools that help people cover their obligations - both expected and unexpected. During this time of economic uncertainty, it makes little sense to strip consumers of this financial option. Senator Brown claims to care about consumers, but pursuing passage of this legislation will harm them, not help them. As such, we urge Senators and Representatives to stand with taxpayers and consumers by opposing this concerning legislation when it is introduced.