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Bank Regulators Should Not Facilitate Predatory Small Dollar Loans as Economy Tanks – Like Taking Away Umbrella as Rainstorm Begins

Monday, March 23, 2020

Instead, policymakers should incorporate as part of the stimulus package a federal rate cap and a ban on overdraft during crisis

WASHINGTON, D.C. – As our nation tries to contain a growing pandemic and our economy heads toward a recession, reporting indicates that bank regulators might choose this moment to eliminate key safeguards that prevent exorbitantly priced, predatory loans. Meanwhile, Senators Sherrod Brown (D-Ohio) and Chris Van Hollen (D-Md.) have just introduced legislation to establish a 36% annual interest rate cap for new loans while not touching lower state rate caps.

Center for Responsible Lending (CRL) Senior Policy Counsel Rebecca Borné released the following statement:

Removing basic consumer protections for small-dollar lending, right as many Americans are about to lose their jobs, income, and savings, makes as much sense as taking away an umbrella as a rainstorm begins.

Protections are needed to stop banks from trapping people in debt. In the early 2010s, a handful of banks issued payday-style loans that put borrowers in an average of 19 loans a year at over 200% APR, draining borrowers of half a billion dollars annually. Safeguards put in place to prevent this predatory lending should remain in force and be strengthened – not eliminated or weakened.

Furthermore, Congress should enact, as part of its stimulus package, legislation for a strong interest rate cap and a prohibition on overdraft fees.

Senators Brown and Van Hollen’s bill for a strong rate cap would prevent loan sharks from exploiting people in this time of desperation. These rate caps have a proven record at the state-level and with military servicemembers.

Legislation, introduced by Senators Booker and Brown, to prohibit bank overdraft fees during this crisis is also needed. These fees already strip billions annually from financially vulnerable Americans. As paychecks take a hit over the coming weeks, overdraft fees will siphon off even greater portions of account holders’ incomes than they already do. Bank overdraft fees are an exploitative practice even during the best economic times. In a crisis like this, they are clearly unconscionable.

Banks are currently able to borrow from the Federal Reserve at 0%. They should be offering reasonably priced credit always but especially now to help people in this crisis.

Additional Background

The agencies who might nix or weaken their safeguards are the Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), and the National Credit Union Administration (NCUA). For example, the good policies that the FDIC currently has in place, which might be on the chopping block are: 2005 guidance limiting the length of indebtedness in payday loans to 90 days in twelve months; 2007 guidelines advising banks abide by a cap of 36% annual interest; and, 2013 guidance recommending banks check a borrower’s ability-to-repay a loan before issuing that loan.

In addition, the Consumer Financial Protection Bureau (CFPB) is expected next month to gut a rule that, if implemented, would stop short-term payday loans from trapping people in debt.

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Press Contact: matthew.kravitz@responsiblelending.org