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Cap Those Rates: Reining in Usurious Lending

A new report from the National Consumer Law Center (NCLC) is advocating a 36 percent interest cap rate that would alleviate the personal debt crisis in the United States.

Such a move is long overdue. The deregulation of the credit industry, which began in 1978 with Marquette National Banks of Minneapolis vs. First Omaha Service Corp., legalized what in the early 20th century used to constitute predatory lending.

Outlawing such abuses was an important victory of progressives and liberals in the 20th century. Thirty four states implemented Uniform Small Loan Laws between 1914 and 1943 to protect borrowers from predatory lending practices. For the next 35 years, affordable small dollar loans would be available to consumers at reasonable rates, which they could pay back without incurring multiple fees and penalties.

But in the 1970s credit cards began to dominate and expand the market for small dollar loans. They were strengthened when the government started deregulating financial industries and allowed national banks to charge credit card customers the highest legal interest rate in whichever state they resided.

Banks quickly migrated to states with no usury limits, such as South Dakota and Delaware, and began lending at rates that matched those of the black market sixty years ago, although now it was legal.

Ever since, American consumers have seen their personal debt skyrocket with fees and interest that seems to trail them forever.

As a result, many progressive groups recently signed a letter applauding Sen. Richard Durbin’s introduction of the to Protecting Consumers from Unreasonable Credit Rates Act of 2013 which would extend the 36 percent usury Annual Percentage Rate (ARP) cap for military families to all borrowers.

Cap limits, the NCLC report suggests, “forces lenders to offer longer term, installment loans that have a more affordable structure. Lenders are also encouraged to do more careful underwriting to ensure that the borrower can afford the loan.

Small, short-term loans are generally more expensive for lenders to facilitate hence the urge to charge high interest rates. The typical short-term loan, usually two weeks, is rolled over eight or nine times and takes four months on average to pay off. It is, essentially, designed to profit off of fees and extended interest rates.

When interest rates are limited, however, lenders are discouraged from engaging in short-term loans that do not guarantee high returns and so focus instead on long-term loans that are affordable for the borrower.

As the evils of deregulation of unbridled interest rates have become more and more clear,” the report concludes, “the 36 percent rate has gained currency. Congress, three federal agencies (DOD, FDIC, and NCUA), and seventeen states have adopted rates of 36 percent or less as the benchmark for affordable small loans.