Dear Speaker Pelosi, Leader McConnell, Leader McCarthy, and Leader Schumer:
As a group representing millions of consumers and taxpayers, we fully understand the difficult plight affecting the vast majority of Americans due to the COVID-19 pandemic, and we support public policies that will bring them temporary tax and regulatory relief. However, we are strongly opposed to policies, euphemistically referred to as relief, that are aimed at thwarting consumer access to private capital at this extremely critical time.
Access to credit is vital for families and communities to invest and grow. For the millions of Americans who rely on small-dollar loans as a last resort, passing an interest rate cap would be even more devastating. Under the guise of looking out for the vulnerable consumers who are trying to obtain loans and stay afloat during these unprecedented times, any proposal of a relief package that would include a nationwide limit on interest rates would put these very consumers in jeopardy by restricting their access to credit.
The consequences of restricting these needed and valued credit options could be very damaging. Previous impositions of interest rate caps in Oregon, Georgia, and North Carolina have led to fewer payday lenders; have worsened the condition of those borrowers most likely to experience adverse consequences from the crisis; have increased the complaints about debt collectors; and increased bankruptcy filings.
Maintaining access to credit for vulnerable consumers especially during economic hardships is crucial. With four in ten American adults unable to cover an unexpected $400 expense, Congress should be taking steps to expand access to credit for low-income households, not reducing it.
Banks avoid consumers with low incomes and poor credit scores. Payday and other small-dollar loans fill a need for the less wealthy consumers who need a quicker turnaround than other financial institutions can offer or who have been locked out of traditional banking services entirely. When the banks turned their backs on consumers during the last recession, these alternative sources of credit became vital. This was the case when the economy collapsed in 2008. Have we not learned from previous experiences and empirical evidence?
With more than 20 million Americans having filed for unemployment claims over the last five weeks, online lenders have already mobilized their efforts to assist their customers during the current health and economic crisis by offering loan forgiveness, freezing interest payments, extending payment plans, waiving fees, and halting collection activities, just to name a few.
As caps will have a chilly effect on consumer access to capital by pushing lenders out of the market, so too will moratoria on collections and delays in payments. Restricting small-dollar lending removes one of the few sources of credit available to these consumers and risks driving them into underground markets or illegal activity, such as loansharking. Instead, Congress should prioritize expanding credit options to vulnerable consumers and not limit them. Continuing to educate consumers is equally important.
We strongly urge Congress NOT to cap interest rates and NOT to restrict access to credit for the most vulnerable Americans in the next Coronavirus relief package. The consequences of doing the opposite would cause irreparable damage for the low income and vulnerable Americans who need access to capital during these critical times.
Director of Policy and Research