The Center for Responsible Lending supports a 36 percent cap on annual interest rates as a measure that would contribute to economic recovery efforts by ending high-interest credit schemes that trap working families in debt. The cap is the only reform that has been effective in stopping payday lenders from trapping their customers in long-term debt at annual rates of 400 percent.
"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."
In the CRL survey, most respondents, 82 percent, voted in last year's presidential election. Only 25 percent thought there should be no cap on interest rates at all.
Congress passed a 36 percent cap in 2006 to protect active members of the military after the Pentagon testified that payday loans were affecting military readiness. Ohio, Arkansas, New Hampshire, and Arizona are among states that recently revoked exemptions from usury caps their lawmakers had given 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 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.
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.
"Recent research links predatory products like payday lending to bankruptcy, closed bank accounts, credit card delinquency and a long list of other financial hardships," Calhoun said. "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."
