Congress Moves to Restore Common Sense to Consumer Credit


Center for Responsible Lending
February 27, 2009

Measure would end abusive 400% interest

Washington - A measure introduced in the U.S. Senate yesterday would speed economic recovery efforts by ending high-interest credit schemes that trap working families in a quagmire of debt.

The bill from Senator Dick Durbin (D-IL), majority whip of the Senate, would cap annual interest rates on consumer credit at 36 percent-a cap that Congress already applied in 2006 nationally to active members of the military. The cap would stop abuses by payday and car-title lenders at a time when keeping as much cash as possible in the hands of working people is crucial to restoring health to the U.S. economy.

"A 36 percent cap on annual interest for consumer credit is a quick, common-sense way to restore protections that have been severely compromised in the consumer credit market," said CRL president Michael Calhoun. "It would cost taxpayers nothing and plug a $5 billion hole in the wallets of working families."

The measure would not affect loans with reasonable interest rates and other manageable terms but would eliminate products that rely on extremely high rates-some carry 400 percent annual interest and higher-and trap consumers in debt they cannot afford.

Ohio, Arkansas, New Hampshire, and Arizona are among states that recently revoked  legal exemptions from usury caps their lawmakers once gave payday lenders. State lawmakers reimposed the usury cap after seeing firsthand the harm payday lending inflicts on borrowers, who typically can't escape quickly from such high-cost debt.

But 35 states have yet to pass reforms that stop such practices. The Durbin bill would fix that gap. It also would set reasonable standards for credit products over which states have no jurisdiction.

Payday loans are marketed as an advance on a borrower's next paycheck, but the terms of these small loans are designed to keep borrowers paying high interest payments over long periods of time without paying off the loan or even paying down the principal.

The federal measure would give all citizens an equal measure of protection from what can only be described as legal loan-sharking, but also would allow state lawmakers to set even stronger protections if they deemed it necessary. Arkansas limits interest to 17 percent within its state constitution, New York makes interest above 25 percent a criminal offense, and Ohio passed a 28 percent cap last year, which was affirmed by voters in a ballot measure in November. A federal cap would not alter these state protections.

"Recent research links predatory products like payday lending to bankruptcy, closed bank accounts, credit card delinquency and a long list of other financial hardships," said Calhoun. "There is really no excuse for failing to stop these abuses now, for the sake of working families across the nation, and for the sake of our economic stability. We see where lax consumer protections led us in the mortgage market. We should learn from that hard-taught lesson."

For more information: Carol Hammerstein at (919) 313-8518 or carol.hammerstein@responsiblelending.org; or Kathleen Day at (202) 349-1871 or kathleen.day@responsiblelending.org.

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.