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Consumer Advocates Applaud CFPB Rule Affirming States’ Ability to Police Credit

 June 28, 2022

CFPB Interpretive Rule Clarifies that Scope of Federal Preemption is Narrow and Targeted

BOSTON – Today, advocates at the National Consumer Law Center commended the Consumer Financial Protection Bureau for affirming the authority of states to regulate credit bureaus, tenant screening companies, and background check agencies, with only limited restrictions. The CFPB issued an interpretive rule clarifying that the scope of preemption under the Fair Credit Reporting Act (i.e. the FCRA’s ability to override state laws) is narrow and targeted.

“This interpretive rule will allow states to better protect their consumers, workers, and tenants from the abuses and flaws of companies that traffic in and profit from our data,” said Chi Chi Wu, National Consumer Law Center staff attorney, “As the laboratories of democracy, states are often faster and better positioned to safeguard their residents against emerging problems than the federal government.  Enabling states to step in and step up is necessary when problems start locally or are unaddressed by the void left by a divided Congress.”

NCLC advocates noted that state legislatures can adopt stronger laws than currently exist to govern tenant screening, which is especially critical given the rental housing crisis in the United States.

“It’s up to the states now to pass laws to ensure that people aren’t unfairly locked out of housing because of tenant screening reports that aren’t reliably predictive of someone’s ability to be a successful tenant,” said Ariel Nelson, NCLC staff attorney. “States should prohibit including questionable eviction records in tenant screening reports, such as evictions that did not result in a judgment against the tenant. States should also prohibit the reporting of rental arrears by debt collectors, or impose significant requirements before such debts can be reported.” 

For more information: NCLC submitted amicus briefs in the two cases discussed in CFPB’s interpretative rule, Consumer Data Industry Association v. Frey and Consumer Data Industry Association v. Bruck.

 




Water Affordability Advocacy Toolkit

Group of Protesters march with signs against mass water shutoffs in Detroit, Michigan on July 18, 2014.

Protesters march against mass water shutoffs in Detroit, Michigan on July 18, 2014. (Pictured at second-from-left: Maureen Taylor, chair of Michigan Welfare Rights Organization, a co-sponsoring organization of the rally.)
Joshua Lott/Getty Images

Written by Olivia Wein, Karen Lusson, & Berneta Haynes, National Consumer Law Center

Co-authored with Larry Levine & Sam Whillans, Natural Resources Defense Council

Across the United States, communities are grappling with rising water and sewer rates, which are increasingly unaffordable for many low-income households. When people cannot afford to pay, they face loss of access to essential water services, spiraling debt and economic hardship, loss of housing, loss of parental custody of children, and grave risks to both individual and community health. Lower-income households and households of color are particularly likely to suffer these consequences. For water systems to deliver safe water to everyone in their communities, we must ensure that bills are affordable for those least able to pay and that no one loses service if they cannot pay.

NRDC and the National Consumer Law Center’s Water Affordability Advocacy Toolkit aims to help address these challenges. It offers a menu of state- and local-level policy solutions that directly address household-level affordability for people served by centralized drinking water or wastewater systems. The Toolkit is informed by the experiences and insights of advocates, activists, and academics across the country. It is designed to help others advocate to policymakers such as utility managers and utility governing boards, local elected officials, state legislatures and state utility commissions, and the courts. Policymakers and utilities can themselves use the Toolkit to better understand problems and solutions that may apply to their communities.

The Toolkit contains a series of modules on specific topics, with each one providing an in-depth explanation of the topic, questions that can help advocates assess gaps in state and local laws and policies, examples of strong state and local programs, policies, and consumer protections from around the country, pitfalls to look out for, and other policy ideas to consider. The modules can be downloaded together or individually:

Contact Info:
Larry Levine, [email protected]
Olivia Wein, [email protected]




NCLC Advocates Praise Proposed Settlement in Sweet v. Cardona

June 23, 2022

Settlement may restore faith in borrower defense process, though barriers to relief remain 

WASHINGTON – Today advocates from the National Consumer Law Center applauded the proposed settlement agreement in the class action lawsuit Sweet v. Cardona, which challenged the U.S. Department of Education’s failure to provide timely decisions on borrower defense applications submitted by federal student loan borrowers seeking loan cancellation based on predatory school conduct. Kyra Taylor, staff attorney at the National Consumer Law Center, issued the following statement:

“The relief promised by this settlement will be life changing for the defrauded borrowers whose loans will be canceled, but the settlement is also important for borrowers who have not filed applications for relief and who will therefore not benefit immediately. Many borrowers who are eligible for relief and are aware of how to apply have not submitted a borrower defense application because they assumed that the Department’s failure to decide claims meant that applying for relief was futile. But the cancellation and decision deadlines provided by this proposed settlement upend those assumptions and will go a long way toward restoring borrowers’ faith that the government will actually cancel debts associated with predatory school conduct. We hope that borrowers who have lost faith in the process see this announcement and submit their borrower defense applications today. 

“The proposed settlement–along with the Department’s recent decision to automatically cancel loans to attend Corinthian Colleges and Marinello–demonstrates that this administration is committed to providing long-overdue relief to federal student loan borrowers who were harmed by their school. But more work remains. Countless borrowers who were scammed by their school have no idea that they are eligible for relief and will not apply without some kind of intervention. Additionally, the Department still requires borrowers to complete a complicated 25-page form to apply for relief. Even with the improvements provided by this settlement, administrative hurdles will stop eligible borrowers from getting the relief they deserve. 

“We urge the Department to do more with its existing authority to streamline its relief process to eliminate predatory debt from the federal student loan portfolio. For example, attorneys general have submitted group relief claims on behalf of thousands of students that have languished for years.  Some of these pending group claims are now the subject of private litigation challenging the Department’s delay. The Department should include the attorneys generals’ group applications within this settlement, and discharge debts for borrowers covered by these outstanding group applications alongside the outstanding individual applications.” 

“In addition, the Department must expand its investigations to unearth additional cases of school misconduct and determine that those borrowers are eligible for relief. The Department should also use its existing findings of eligibility for relief as a basis for issuing group discharges that automatically cancel borrowers’ debts, without requiring individual applications. Finally, the Department should engage in direct outreach to borrowers to inform them that they may be eligible for relief, and should simplify the process for borrowers to apply.”  

Additional resources:

  • Letter submitted by 23 advocacy organizations and unions to the U.S. Department of Education asking for the cancellation of debts associated with all outstanding borrower defense claims.  (April 13, 2021)
  • Press release regarding the Department’s decision to cancel all Corinthian College borrowers’ debts (June 2, 2022)
  • Press release regarding the Department’s decision to cancel Marinello School of Beauty Borrowers’ Debts  (April 28,2022)
  • Press release regarding Hemphill v. Cardona lawsuit alleging that the Department of Education had illegally ignored its responsibility to issue a decision on a group borrower defense claim submitted by the Illinois Attorney General  on behalf of former-students that attended Westwood College’s Criminal Justice programs. (May 19, 2022)
  • Press release regarding Dunn v. Cardona lawsuit alleging the Department of Education ignored its responsibility to issue a decision on a group borrower defense application submitted by the Massachusetts Attorney General  on behalf of former students who attended the Medical Assistant and Medical Billing and Coding programs of the now-defunct Kaplan Career Institute. (April 26, 2022)

 




50-State Survey: State Predatory Lending Laws Show Significant Changes

June 22, 2022

NCLC’s Review of State Consumer Protection Laws Sees States Gaining, Losing Protections for Popular $2,000 Two-Year and $500 Six-Month Installment Loans 

WASHINGTON – A new report from the National Consumer Law Center finds progress toward a 36% APR cap for common short-term and longer-term loans in some states. In states that allow high-cost loans, exorbitant interest rates can trap borrowers in a cycle of debt. Two states – New Mexico and North Dakota – enacted new laws that dramatically reduce the APRs and fees allowed for a $500 six-month and $2,000 two-year installment loan. On the other hand, several states went in the opposite direction, allowing predatory loans to carry even higher APRs.

“We applaud the actions that states like New Mexico and North Dakota took to protect residents from high-cost debt-trap installment loans,” said Carolyn Carter, deputy director of the National Consumer Law Center and author of the report. “And we thank Louisiana Governor John Bel Edwards for his decision to veto a bill that would have allowed an APR of almost 300% on a $500 6-month loan.”

Predatory Installment Lending in the States includes maps and tables for annual percentage rate caps in every state and the District of Columbia, tracks installment loan changes in the states since mid-2021, and provides key recommendations for states to protect residents from predatory high-cost lending. 

In 2021, the state legislature in North Dakota imposed a 36% APR cap on all non-bank installment loans–previously there had been no cap at all for loans over $1,000. (High-cost, short-term payday loans continue to be available in North Dakota.) The New Mexico legislature reduced its APR cap from a predatory 175% to 36% for a $2,000, two-year loan and 52% for a $500, six-month loan. Also on the plus side, Maine tightened its anti-evasion provision. 

On the other hand, the Oklahoma legislature authorized another junk fee, just three years after another bad bill that increased the allowable per-month fees for small loans, continuing its practice of chipping away at consumer protections. Mississippi extended its highly abusive “Credit Availability Act,” which allows APRs as high as 300% for 4 to 12-month loans of $2,500 or less, and Wyoming repealed special protections that had formerly applied to loans at the high end of the rates it allows. Finally, Hawaii repealed its payday loan law, making progress on short-term payday loans, but replaced that law with a new law that allows an APR of 146% for a $500, six-month installment loan.

The recommendations for states to protect residents from predatory high-cost lending include: 

  • Capping APRs, including fees, at 36% for smaller loans, such as those of $1,000 or less, with lower rates for larger loans;
  • Prohibiting loan fees or strictly limit them to prevent fees from being used to undermine the interest rate cap and acting as an incentive for loan flipping;
  • Preventing loopholes for open-end credit. Rate caps on installment loans will be ineffective if lenders can evade them through open-end lines of credit with low-interest rates but high fees;
  • Banning the sale of credit insurance and other add-on products, which primarily benefit lenders and increase the cost of credit; and
  • Examining consumer lending bills carefully. Predatory lenders often propose bills that obscure the true interest rate, for example, by presenting it as 24% per year plus 7/10ths of a percent per day, instead of as 279%. Or the bill may list the per-month rate rather than the annual rate. Get a calculation of the full APR, including all interest, all fees, and all other charges, and reject the bill if it is over 36%.

“In the absence of rate limits at the federal level, state interest and fee caps are the primary bulwarks against predatory lending,” said Carter. “By following these guidelines, states can ensure that their laws are effective at protecting consumers.”

Related Resources




Talia Rothstein, Hobbs Fellow

Headshot of a person with short brown hair in a black tee shirtTalia K. Rothstein (they/them) is the 2022 Hobbs Fellow at NCLC and a third-year law student at Yale. In law school, Talia supports worker organizing in the Worker Rights and Immigrant Advocacy Clinic and seeks disability benefits for LGTBQ+ veterans in the Veterans Legal Services Clinic. Talia spent last summer at the ACLU of Pennsylvania and graduated cum laude from Harvard College. After graduation, Talia will be clerking for Judge William J. Kayatta, Jr. on the First Circuit.




U.S. Consumers Will Save $30 Billion with Proposed Residential Gas Furnace Standards

June 13, 2022

Resistance by Gas Utilities Has Not Allowed for a Meaningful Update to Furnace Standards in 35 Years

Today, national consumer groups hailed the release of the Department of Energy’s proposal to increase energy efficiency standards for residential furnaces as a crucial step toward saving consumers at least $30.3 billion on their energy bills. The Consumer Federation of America, National Consumer Law Center, and Consumer Reports, upon initial review, are in support of the Biden Administration’s proposed rule which will benefit the vast majority of consumers who currently have outdated, inefficient gas furnaces. The rule will save consumers money on electricity bills, and reduce greenhouse gas emissions that contribute to climate change.

The standards governing gas furnaces have been in place for well over a quarter of a century with no meaningful improvement. U.S. consumers cannot afford to wait any longer for pocketbook savings of $30.3 billion. These savings must be delivered post-haste via new standards.

“A strong updated efficiency standard will ensure that the efficiency level of all furnaces on the market will meet a higher minimum standard,” said Charlie Harak, Staff Attorney at the National Consumer Law Center. “Many homeowners lack the time or information needed to choose to upgrade to a more efficient furnace, especially if they are doing an emergency replacement. Many others are renters – often disproportionately low-income consumers – and without strong, economically justified furnace standards, their property owners will install less expensive and less efficient furnaces, burdening tenants with higher bills for decades to come.”

“Strong updated efficiency standards will save consumers money over the life of the furnace,” said Mary Greene, Senior Policy Counsel for Sustainability Policy at Consumer Reports. “Overall, Consumer Reports is pleased that DOE is proposing a standard that will help save consumers money, and bring significant environmental benefits.

“Although the harm done to consumers through years of inaction and stonewalling by the gas utilities on this standard cannot be undone, by adopting a higher standard today, future harm can be prevented,” said Richard Eckman, Energy Advocate at CFA. “We will urge the Department to move with all due speed to finalize a long overdue, much-needed standard that does away with inefficient, energy-wasting furnaces so that consumers will pay less on their energy bills.”

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The Consumer Federation of America is a nonprofit association of more than 250 consumer groups that was founded in 1968 to advance the consumer interest through research, advocacy, and education.

Founded in 1936, Consumer Reports (CR) is an independent, nonprofit and nonpartisan organization that works with consumers to create a fair and just marketplace. Known for its rigorous testing and ratings of products, CR also advocates for laws and corporate practices that are beneficial for consumers. CR is dedicated to amplifying the voices of consumers to promote safety, digital rights, financial fairness, and sustainability. The organization surveys millions of Americans every year, reports extensively on the challenges and opportunities facing today’s consumers, and provides ad-free content and tools to 6 million members across the United States.




Predatory Installment Lending In the States 2022

June 2022

National Consumer Law Center Logo
© Copyright 2022, National Consumer Law Center, Inc. All rights reserved.

How Well Do the States Protect Consumers Against High-Cost Installment Loans?

Caps on interest rates and loan fees are the primary vehicle by which states protect consumers from predatory lending. Forty-five states and the District of Columbia (DC) currently cap interest rates and loan fees for at least some consumer installment loans, depending on the size of the loan. However, the caps vary greatly from state to state, and a few states do not cap interest rates at all.

For a $500, six-month installment loan, 45 states and DC cap rates, at a median of 39.5%.

  • 19 states and the District of Columbia cap the annual percentage rate (APR) at 36% or less.
  • 13 states cap the APR between 36% and 60%.
  • 13 states cap the APR at more than 60%.
  • Three states—Idaho, Utah, and Wisconsin—require only that the loan not be “unconscionable” (a legal principle that bans terms that shock the conscience).
  • Two states—Delaware and Missouri—impose no cap at all.

Map 1: APRs Allowed for Six-Month $500 Installment Loan

This map shows the maximum APRs allowed by the states for closed-end installment loans (loans in which the amount borrowed and the repayment period are set at the outset) by licensed non-bank lenders.

Map of the United States identifying the following annual percentage rate caps: AL: 94%, AK: 36%, AZ: 54%, AR: 17%, CA: 45%, CO: 91%, CT: 36%, DE: no cap, DC: 24%, FL: 48%, GA: 61%, HI: 146%, ID: no cap, IL: 36%, IN: 89%, IA: 36%, KS: 43%, KY: 47%, LA: 85%, ME: 30%, MD: 33%, MA: 37%, MI: 43%, MN: 51%, MS: 305%, MO: no cap, MT: 36%, NE: 48%, NV: 40%, NH: 36%, NJ: 30%, NM: 52%, NY: 25%, NC: 16%, ND: 36%, OH: 145%, OK: 204%, OR: 36%, PA: 27%, RI: 35%, SC: 72%, SD: 36%, TN: 106%, TX: 93%, UT: no cap, VT: 24%, VA: 129%, WA: 39%, WV: 38%, WI: no cap, and WY: 36%.

For a $2,000, two-year installment loan, 43 states and DC cap rates, at a median of 32% APR.

  • 34 states and the District of Columbia cap the APR at 36% or less.
  • 9 states cap it between 36% and 60% APR.
  • Five states—Alabama, Idaho, South Carolina, Utah, and Wisconsin—require only that the loan not be “unconscionable.”
  • Two states—Delaware and Missouri—impose no cap at all.

Map 2: APRs Allowed for Two-Year $2,000 Installment Loan

This map shows the maximum APRs allowed by the states for closed-end installment loans (loans in which the amount borrowed and the repayment period are set at the outset) by licensed non-bank lenders.

Map of the United States identifying the following annual percentage rate caps: AL: no cap, AK: 31%, AZ: 41%, AR: 17%, CA: 25%, CO: 31%, CT: 36%, DE: no cap, DC: 24%, FL: 31%, GA: 32%, HI: 31%, ID: no cap, IL: 36%, IN: 40%, IA: 36%, KS: 32%, KY: 42%, LA: 38%, ME: 30%, MD: 30%, MA: 24%, MI: 30%, MN: 32%, MS: 59%, MO: no cap, MT: 36%, NE: 30%, NV: 40%, NH: 36%, NJ: 30%, NM: 36%, NY: 25%, NC: 31%, ND: 36%, OH: 37%, OK: 34%, OR: 36%, PA: 24%, RI: 29%, SC: no cap, SD: 36%, TN: 43%, TX: 35, UT: no cap, VT: 21%, VA: 50%, WA: 29%, WV: 33%, WI: no cap, and WY: 31%.

Why States Should Cap Interest Rates and Fees

Caps on interest rates and loan fees are the primary vehicle by which states protect consumers from predatory lending. In the absence of rate caps, exploitive lenders move into a state, overwhelming the responsible lenders and pushing abusive loan products that trap low-income consumers in never-ending debt.

“[It] was like I asked for help to dig out of this hole and just created a deeper hole for me to inhabit.” NPR interview of Sarah Ahmed, who borrowed $2,300 at 98% to rent an apartment and get her young son set up in an after-school program.

Interest rate caps are more than numbers: they are reflections of society’s collective judgment about moral and ethical behavior. Interest rate caps embody fundamental values.1 Interest rate caps also reflect an assessment about the upper limits of sustainable lending that does not undermine individual or societal economic stability. When states eliminate high-cost loans by imposing rate caps, consumers generally agree that they are better off and express relief that the loans are no longer available.2 Elimination of high-cost loans spurs an increase in affordable loans, benefiting all borrowers.3

In addition to limiting the cost of the loan for the borrower, limits on finance charges encourage lenders to ensure that the borrower has the ability to repay the loan. Excessive interest rates enable lenders to profit from loans even if many borrowers eventually default.4 Knowing that it will be made whole even if the borrower defaults, or that it can recoup defaults from exorbitant rates on others, the lender has little incentive to ensure that each borrower can actually afford to repay the loan in full on its terms.

High-cost loans, including high-cost installment loans, have a disproportionate impact on communities of color.5 Payday lenders have long targeted these communities.6 High-cost loans do not promote financial inclusion, but drive borrowers out of the banking system and exacerbate existing disparities.7

The APR is an Essential Standard for Measuring and Comparing the Cost of a Loan

The rates listed above are the annual percentage rates (APRs) as calculated under the Truth in Lending Act (TILA) for installment loans and include both period interest and fees. The APR is a critical way to measure and compare the cost of a loan, because it takes both interest and fees, and the length of the repayment period into account. It provides a common, apples-to-apples comparison of the cost of two different loans, even if they have different rate and fee structures or are used to borrow different amounts for different periods of time.

The Military Lending Act (MLA), which places a 36% APR cap on loans to members of the military and their families, requires the APR to take into account not just interest and fees but also credit insurance charges and other add-on charges. The MLA is also far more accurate than TILA as a disclosure of the cost of open-end credit such as credit cards. Because of this, the MLA APR is the gold standard, both for purposes of cost comparison and for purposes of legal rate limits. However, because of the difficulty of identifying the cost of credit insurance and other add-ons allowed, in the abstract, by the various state laws (as opposed to calculating the MLA APR for a given loan), we have used the TILA APR rather than the MLA APR in the rates displayed above.

For detail about how we calculated the APRs, see the Appendix.

Significant Changes in the States Since Mid-2021

Seven states made significant changes affecting their APR caps since we issued our last report in mid-2021. North Dakota and New Mexico made the most significant improvements. In North Dakota, the state legislature imposed a 36% APR cap on all non-bank loans in the state. Previously, there was no cap at all that applied to loans over $1,000. New Mexico reduced its APR cap from a predatory-level 175% to 36%, plus a fee of 5% of the loan amount for loans of $500 or less. Also on the plus side, Maine tightened its anti-evasion provision.

On the other hand, the Oklahoma legislature amended its lending laws to allow another junk fee, just three years after it increased the allowable per-month fees for small loans, thus continuing its practice of chipping away at consumer protections. Mississippi extended the sunset date of its highly abusive “Credit Availability Act” for four more years, and Wyoming repealed special protections that had formerly applied to loans at the high end of the rates it allows. Finally, Hawaii repealed its payday loan law, but replaced it with a new law that greatly increases the allowable APRs for installment loans of up to $1,500.

Louisiana consumers narrowly escaped the effects of a bill that would have allowed an APR of almost 300% on a $500 6-month loan. Governor John Bel Edwards’ veto of S.B. 381 on May 31 protected Louisiana families from this highly abusive proposal.

Details about the new laws:

Hawaii repealed its payday loan law, but in its stead enacted a new law, H.B. 1192, which allows longer and larger high-rate loans. For a 6-month loan of $500, the new law increases the allowable interest rate from 25% to a jaw-dropping 146%.

Maine added a strong anti-evasion provision to its non-bank lending law, which places a 30% APR cap on all installment loans under $2000, with a lower cap on larger loans. The new law, L.D. 522 (S.P. 205), is targeted in particular at rent-a-bank lenders that purport to launder their loans through banks as a way of evading state lending laws.

Mississippi enacted H.B. 1075, which extends the sunset date of its “Credit Availability Act” from July 1, 2022 to July 1, 2026. This Act allows highly abusive installment lending, with interest rates of 300% on four- to twelve-month loans of up to $2,500.

New Mexico greatly improved its protection of consumers from predatory lending by enacting H.B. 132, effective January 1, 2023. The new law caps interest on installment loans at 36% (plus a fee of 5% of the loan amount for loans of $500 or less, resulting in a 52% APR for that sample loan). The state had formerly allowed an APR of 175% for installment loans.

North Dakota put an end to high-cost installment lending in the state by enacting S.B. 2013, effective August 1, 2021. The bill imposes a 36% APR cap on all non-bank loans in the state. Previously, the state had no cap at all on the interest and fees that could be charged for non-bank loans over $1,000.

Oklahoma enacted S.B. 796, which raises allowable interest rates for certain installment loans, and allows non-bank lenders to add a junk fee of $38.85 to every loan. As a result, the APR that can be charged for a $2,000 two-year loan increases from 27% to 34%.

Wyoming formerly divided non-bank loans to consumers into two categories: “supervised loans,” which were subject to more restrictions on their terms but could charge 36% on the first $1000 and 21% on the remainder, and all other loans, for which the interest rate was capped at 10%. Effective July 1, 2021, H.B. 8 eliminates this distinction and allows the higher rates to be charged on all loans covered by the state Consumer Credit Code. The bill also repealed all the special protections that had applied to supervised loans.

Earlier Changes in State Lending Laws: 2017 to Mid-2021

Major changes in the states from 2017 to mid-2021 are summarized in the table below and described in more detail in NCLC’s May 2021 and February 2020 reports on state APR caps.

Table: Significant State Changes from 2017 to Mid-2021

California ​Capped APRs for loans between $2,500 and $10,000 (previously there was no cap); APR for loan of $2,600 is capped at 41%
Colorado Reduced the APR for payday installment loans under the state’s Deferred Installment Loan Act from 180% or more to 36% (but state still allows a 91% APR for a $500 six-month loan under another law)
Illinois Capped APR for all non-bank loans at 36%, calculated using the Military Lending Act methodology
Indiana Increased the already excessive fees that lenders can charge
Iowa Increased allowable APR for $2,000 two-year loan from 31% to 36%
New Mexico Capped APRs for consumer loans of $5,000 or less at 175%; formerly there was no cap
Ohio Closed loopholes for fees that made rate caps ineffective; now caps the rate on a $2,000, 2-year loan at 37% APR, although the law still allows very high rates for loans of $1,000 or less
Oklahoma Increased allowable APR for $500 six-month loan from 108% to 204%
Tennessee Increased junk fees that non-bank lenders can charge
Virginia Closed a loophole that payday lenders were using to evade the state’s rate caps, but greatly increased the caps for non-bank installment loans, from 36% to 129% for a $500 six-month loan and from 36% to 50% for a $2,000 two-year loan.

Recommendations: A 36% APR Cap

To protect consumers from high-cost lending, states should:

  • Cap APRs at 36% for smaller loans, such as those of $1,000 or less, with lower rates for larger loans.
  • Prohibit loan fees or strictly limit them to prevent fees from being used to undermine the interest rate cap and acting as an incentive for loan flipping.
  • Prevent loopholes for open-end credit. Rate caps on installment loans will be ineffective if lenders can evade them through open-end lines of credit with low interest rates but high fees.
  • Ban the sale of credit insurance and other add-on products, which primarily benefit the lender and increase the cost of credit.
  • Examine consumer lending bills carefully. Predatory lenders often propose bills that obscure the true interest rate, for example, by presenting it as 24% per year plus 7/10ths of a percent per day instead of 279%. Or the bill may list the per-month rate rather than the annual rate. Get a calculation of the full APR, including all interest, all fees, and all other charges, and reject the bill if it is over 36%.

The 36% rate cap is a widely accepted measure of the top acceptable rate and has been broadly supported by both lenders and the general public.8 But for loans in the thousands of dollars, 36% is too high, and a tiered structure that lowers rates as loans get bigger is appropriate. For example, for loans up to $10,000, Alaska allows 36% on the balance up to $850, and 24% on the remainder, with no additional fees.9

In addition, states should make sure that their loan laws address other potential abuses. States should:

  • Require lenders to evaluate the borrower’s ability to repay any credit that is extended.
  • Prohibit mechanisms, such as security interests in household goods and post-dated checks, that coerce repayment of unaffordable loans.
  • Require proportionate rebates of all up-front loan charges when loans are refinanced or paid off early.
  • Limit balloon payments, interest-only payments, and excessively long loan terms. An outer limit of 24 months for a loan of $1,000 or less and twelve months for a loan of $500 or less might be appropriate, with shorter terms for high-rate loans.
  • Employ robust licensing and reporting requirements, including default and late payment rates, for lenders.
  • Include strong enforcement mechanisms, including making unlicensed or unlawful loans void and uncollectible and providing a private right of action with attorneys’ fees.
  • Tighten up other lending laws, including credit services organization laws, to prevent evasions.

See NCLC’s 2015 report on high-cost small loans for more details on each of these recommendations.

In the absence of rate limits at the federal level, state interest and fee caps are the primary bulwark against predatory lending. By following these guidelines, states can ensure that their laws are effective at protecting consumers.

Authors and Acknowledgments

Co-authors: Carolyn Carter, deputy director, National Consumer Law Center; Lauren Saunders, associate director, National Consumer Law Center; Margot Saunders, senior counsel, National Consumer Law Center. The authors thank NCLC colleagues Anna Kowanko, Andrew Pizor, Michelle Deakin, Stephen Rouzer, and Moussou N’Diaye for assistance, and Julie Gallagher for graphic design.

Related Resources

Publications

Consumer Credit Regulation Book Cover     

Appendix

Methodology

This report addresses the APRs allowed by the non-bank lending laws of the fifty states and the District of Columbia for consumer installment loans of at least $500 for at least six months. It compares the maximum APRs that the states permit for two sample loans: a $500 six-month loan and a $2,000 two-year loan.

The purpose of an APR is to express the full cost of a loan on an annual basis, so that the costs of loans of different amounts, different lengths, and different mixtures of interest and fees can be compared to each other.10 The APR is especially important for revealing the full cost of a loan that charges fees in addition to a periodic interest rate. For example, Arizona allows 36% interest on a $500 six-month loan, but also allows an origination fee of 5% of the principal. Taking both the interest and this origination fee into account, the APR is 54%. If only the interest were allowed, the APR would be 36%.

A number of states have more than one statute under which our two sample loans can be made. If a state has several statutes, or its statute allows several different rates, we have used the highest rate allowed.

In many states, the allowed rates produce a higher APR for the $500 loan than for the $2000 loan. This occurs for two reasons. First, some states impose lower rate caps on larger loans. Second, in states where lenders are permitted to charge a fixed fee on top of the interest rate, that fee will have a greater impact on a smaller loan than a larger one. For example, an additional $50 charged on a $500 loan will have more of an impact on the APR than the same $50 fee will have on a $2,000 loan.

Many state lending laws have ambiguities that affect the calculation of the APR. For example, a lending law may allow a lender to charge an origination fee without specifying whether it can also charge interest on that fee. In the absence of clear statutory language or regulatory guidance, in our calculations we treated origination fees as amounts that can be added to the principal and on which interest can be charged. For other ambiguities, we have used our best judgment to find an interpretation that seems consistent with the statutory language and the intent of the statute, subject to correction if we are able to get clarification from regulators. Policymakers should consider issuing regulations or other guidance to close loopholes created by these ambiguities that high-cost lenders could exploit.

A thorough discussion of credit math calculations under state lending laws may be found in National Consumer Law Center, Consumer Credit Regulation Ch. 5 (3d ed. 2020).

Endnotes


1 See National Consumer Law Center, Consumer Credit Regulation § 1.3.2 (3d ed. 2020) (“CONSUMER CREDIT REGULATION”) (tracing the origin of the general usury laws on the books in many states today to England’s laws before American independence).
2 National Consumer Law Center, After Payday Loans: Consumers Find Better Ways to Cope with Financial Challenges (Aug. 2021).
3 Id.
4 National Consumer Law Center, Misaligned Incentives: Why High-Rate Installment Lenders Want Borrowers Who Will Default (July 2016).
5 S. Ilan Guedj, Ph.D., Report Reviewing Research on Payday, Vehicle Title, and High-Cost Installment Loans 9 (May 14, 2019).
6 See, e.g., Brandon Coleman & Delvin Davis, Center for Responsible Lending, Perfect Storm: Payday Lenders Harm Florida Consumers Despite State Law at 7, Chart 2 (March 2016).
7 CFPB, Online Payday Loan Payments at 3-4, 22 (April 2016).
8 See See Lauren Saunders, National Consumer Law Center, Why Cap Interest Rates at 36%?, August 2021
9 Alaska Stat. § 06.20.230.
10 See 15 U.S.C. § 1601(a) (“It is the purpose of [the Truth in Lending Act, which requires disclosure of the APR] to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him”); National Consumer Law Center, Truth in Lending § 1.1.1 (10th ed. 2019) (purpose of TILA to provide uniformity and enable comparison of disclosures of cost of credit).
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Working Twice As Hard To Get Half As Far: The Impact of Student Loan Debt on Black Women

June 7, 2022

Our nation’s long-standing discriminatory and racist economic practices have stripped Black families of the wealth and resources they need to support their children’s pursuit of higher education. Black students at every income level are disproportionately more likely to rely on loans to cover the cost of a college education. Black women, in particular, hold median student debt burdens that are two-thirds higher than that of white men. The design of the student loan program and labor market discrimination make it incredibly difficult for Black borrowers to pay down their debt. Even after 12 years of repayment, the typical Black borrower owes more than the principal borrowed (whereas the typical white male borrower has paid down the majority of the principal borrowed).

This webinar will discuss the need to cancel student loan debt and to put in place other protections to protect Black borrowers and other borrowers of color. We will also discuss policy recommendations to mitigate the impact of student loan debt and help Black borrowers build generational wealth.

Speakers:

Christelle Bamona, Center for Responsible Lending
Victoria Jackson, The Education Trust
Professor Louise Seamster, University of Iowa

Moderated by Nikhol Atkins, with a Video Introduction from Congresswoman Ayanna Pressley

 

recording only

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Report: Student Debt Cancellation Will Help Fix Broken Student Loan System, Close Racial Wealth Gap

June 8, 2022

A new report from CLASP and NCLC explores debt cancellation and other measures to reduce the harmful impact of disproportionate student loan debt on Black borrowers

WASHINGTON – A new report from the Center for Law and Social Policy (CLASP) and the National Consumer Law Center (NCLC) highlights the disproportionate impact of student debt on Black borrowers and provides recommendations for addressing racial disparities through federal policies and executive action. The report comes as momentum builds for President Biden to announce a plan canceling some amount of student debt.

“The generations-old racial wealth gap and inequitable employment opportunities, combined with the high cost of college attendance, present significant barriers to economic stability for Black workers,” said J Geiman, policy analyst at CLASP. “With these hurdles in place, Black students and their families face undue hardship in the form of student loan debt.”

The four-year college degree has been marketed to populations with low incomes and Black Americans as a way to escape the cycle of poverty and close the racial wealth gap. However, the report, which examines data tracking student loan payments and the amount owed years after graduation, finds that a combination of higher initial loan amounts and inequitable employment and earning outcomes, compounded by student loan system design choices, places an undue burden on Black borrowers.

“The Biden Administration has promised widespread relief and student loan reform, both of which are critical for Black Americans still struggling to recover from the economic impacts of the COVID-19 pandemic,” said Alpha Taylor, staff attorney at the National Consumer Law Center. “By adopting the solutions outlined in our report, policymakers can begin to remediate decades of harm suffered by existing borrowers and ensure that Black Americans are able to obtain a college degree without the disproportionate, intergenerational burden of student loan debt.”

The report’s recommended steps to address the dual student loan and college affordability crises include administrative and congressional action to:

  • Provide broad-based student debt cancellation to all borrowers, without an income cap or other administrative barriers to access;

  • Extend the student loan payment pause;

  • Ensure a smooth transition of loan accounts to new servicers;

  • Provide increased protections for borrowers, particularly those who are victims of predatory lending and for-profit colleges;

  • Strengthen existing repayment options, including Income-Driven Repayment (IDR); and

  • Invest in college affordability through federal initiatives like the Pell Grant, a federal free community college program, and support for student basic needs.

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NCLC Advocates Applaud the Department of Education’s Decision To Cancel Corinthian College Students’ Federal Student Loan Debts

June 2, 2022

WASHINGTON – Today, the U.S. Department of Education announced that it would cancel the federal student loans of over 560,000 people who attended Heald College, Everest Institute, or WyoTech, schools owned by the shuttered for-profit Corinthian Colleges. 

Kyra Taylor, staff attorney at the National Consumer Law Center, praised this decision and said:

“For the last seven years, NCLC advocates have been calling on the Department of Education to provide relief to Corinthian College students who were harmed by the Department’s failure to ensure that only quality schools are permitted to receive federal aid. Finally, the Department has decided to use its authority to automatically discharge the debts of over 560,000 Corinthian borrowers. The Department’s announcement means that these borrowers are finally financially unburdened from the harm caused by these exploitative schools.  

“Students from Corinthian Colleges were left with mountains of debt but little to show for it and were unable to repay their loans. Those loans in turn destabilized them financially and caused them to struggle to get various forms of credit – such as car loans and mortgages. 

“For too long, the Department of Education has required students who attended Corinthian schools to submit a borrower defense application to access relief and then left the student to wait months, if not years, for a decision on that application. That system of providing relief was rife with problems: most borrowers do not know that they can apply for an administrative discharge or how to do so, and those who did manage to apply often could not navigate the maze of paperwork and legal standards needed to prove that they had a right to relief. Automatic relief is essential to ensuring that borrowers access the relief they are eligible for and very much need.

“We applaud the decision to automatically discharge the federal loans these borrowers took out to attend these unscrupulous schools. Today’s action allows these borrowers to finally move past the harm Corinthian Colleges caused them. 

“I deeply hope that the government will act swiftly to use its existing authority to provide automatic discharges to more borrowers who attended other predatory schools, as hundreds of thousands more students deserve similar relief.” 

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