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The Cap Survived

posted by Elizabeth Warren

The Talent-Nelson bill to limit interest rates on lending to soldiers to 36% just passed the House-Senate Conference.  Katie Porter wrote about this earlier.  When the House and Senate come back to vote on the Defense Authorization bill, the cap will be in there—and there can be no more amendments.   The only choices are to vote yes or no.

Mark this day on your calendar:  Usury rates are back.  The circumstances are limited, and politics may be driving the outcome.  But Congress finally said, at least in this limited circumstance, “Enough is enough.”  Credit issuers everywhere—from payday lenders to credit card companies to home mortgage issuers—felt a slight disturbance in the force.

Soon it will be OK to roll an elderly person with a 400% interest rate, or a Hispanic worker, or a college student, but not someone in the military.  How long will that last?

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A good day it is! It seems that 36% has become the new 12% (which appears, as far as I can tell, to have been the "standard" usury maximum in Canon and Civil Law before the 20th century era of free-love for creditors), but 36% is better than 100% or more.

Louisiana law limits payday lenders to 36% annual for all loans, and I suspect many other states do the same (though, as we all know, these limits are ineffectual in most cases, thanks to the National Bank Act). Anecdotal evidence from students directly and indirectly involved in this industry over the years suggests that 36% is PLENTY to allow for a profitable business. Perhaps this new bill is just the momentum that proponents of a re-regulation on usury need. I'd be surprised to see massive opposition from credit card lenders to a 36% cap (which seems to be about as high as credit card lenders are gutsy enough to go).

Thanks for pointing out this development, which I otherwise likely would have missed.

This seems like bad news to me. Unless Congress backs up the cap with rigorous monitoring and enforcement, I can't think of why small time operators won't evade or ignore the cap anyway (like they have done in states and countries with caps like Texas and Canada), leaving the most unsavory lenders in the market and discouraging more reputable lenders from offering fringe products. Also, if it is effective, I wonder if it will push military personnel into the hands of informal lenders (i.e., other military personnel who are not constrained by debt collection laws, TILA, etc).
It might provide a great chance to research what happens to a population that is excluded from fringe credit options.

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