Leaders of major U.S. banks on Wednesday expressed interim support for a federal interest rate cap on consumer loans, which would likely include payday loans and auto loans.
In a hearing held by the Senate Committee on Banking, Housing and Urban Affairs on Wednesday, Senator Jack Reed, DR.I., asked CEOs of Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Wells Fargo if they would support a 36% cap on interest rates on consumer loans like payday loans.
The bank’s CEOs did not immediately dismiss the idea. “We absolutely do not charge such high interest rates for our customers,” said Jane Fraser, CEO of Citi, in response to Senator Reed’s question. She added that Citi would like to take a look at the law, just to make sure there aren’t any unintended consequences. “But we appreciate the spirit and the intention behind it,” she said.
The CEOs of Chase, Goldman and Wells Fargo have agreed they would like to review any final legislation, but all have expressed openness to the idea.
David Solomon, CEO of Goldman Sachs, said he wanted to ensure that a “materially different interest rate environment” did not stop lending to anyone. “But in principle, we think it’s good to have that transparency and to look at it carefully,” he said.
Brian Moynihan, CEO of Bank of America, said he also understands “the spirit” of the law.
Currently, 18 states, as well as Washington DC, impose a 36% rate cap on interest rates and fees for payday loans, according to the Center for Responsible Lending. But Senator Reed, along with Senator Sherrod Brown, in D-Ohio, had already introduced legislation in 2019 that would create a federal interest rate cap of 36% on consumer loans. Senator Brown told Reuters earlier this week that he plans to reintroduce the bill.
In states that allow payday loans, borrowers can usually take out one of these loans by going to a lender and simply providing valid ID, proof of income, and a bank account. Unlike a mortgage or car loan, there is usually no physical collateral required and the amount borrowed is usually due two weeks later.
Yet high interest rates, which exceed the annual rate of 600% in some states, and the short turnaround time can make these loans expensive and difficult to repay. Research by the Consumer Financial Protection Bureau found that almost 1 in 4 payday loans are re-borrowed nine or more times. Additionally, borrowers take about five months to repay loans and cost them an average of $ 520 in finance charges, reports The Pew Charitable Trusts.
The big banks are not completely impartial when it comes to small loans. Although banks don’t usually give small loans, this is changing. In 2018, the Office of the Comptroller of the Currency gave the green light to banks to initiate small loan programs. Meanwhile, many payday lenders say a 36% rate cap could bankrupt them, which could give banks an edge. If payday lenders were to go out of business because of a federal rate cap, it could force consumers to use banks offering these loans.
In May 2020, the Federal Reserve released “Lending Principles” for banks to offer responsible small dollar loans. Several banks have already embarked on the business, including Bank of America. The other banks represented in the panel have not yet deployed low-value lending options.
Last fall, Bank of America launched a new low-dollar loan product called Balance Assist, which allows existing customers to borrow up to $ 500, in $ 100 increments, for a flat fee of $ 5. The APR on the product ranges from 5.99% to 29.76%, depending on the amount borrowed, and customers have three months to repay the loan in installments.
According to Moynihan on Wednesday, one of the reasons Bank of American created the Balance Assist product was to help clients avoid payday lenders.
While advocates argue that the interest rate cap on payday loans prevents consumers from getting it wrong with these traditionally expensive loans, opponents argue that these types of laws will reduce access to credit by forcing lenders to stop. their activities with unsustainable rates, leaving people nowhere. turn when they are strapped for cash.
Recent research argues that consumers may be better served by rules that require lenders to deny borrowers any new loan for a period of 30 days after taking out three consecutive payday loans, rather than putting a cap on the loan. interest rate.
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