Federal bill would cap loan interest for consumers

Wisconsin Congressman Glenn Grothman (R-Glenbeulah) introduced bipartisan legislation this week along with several progressive co-sponsors that aimed at protecting consumers from predatory lenders. 

“Just on its face, where you’re getting interest rates up over 300%, it’s immoral,” Grothman said in a telephone press conference on Tuesday to mark the introduction of the bill. Citing a study used in preparation for the bill, he added, among “anybody age 22 to 53, 13% of the American public has taken out a payday loan in the last two years. And that’s just appalling.”

The bill, The Veterans and Consumers Fair Credit Act, co-sponsored by Rep. Jesús “Chuy” García (D-Ill.) in the House and Sens. Jeff Merkley (D-Ore.), Jack Reed (D-R.I.), Sherrod Brown (D-Ohio) and Chris Van Hollen (D-Md.), would cap interest rates on consumer loans at 36% APR.

“An interest rate cap is the simplest, most effective way to stop these debt trap loans,” Peter Skopec, director of the Wisconsin Public Interest Research Group (WISPIRG), said in a statement Tuesday praising Grothman and the other lawmakers behind the bill. “Their work will help protect consumers from predatory loans that cause so much harm in our state and throughout the country.”

Only Republican

Grothman is so far the only Republican listed as a sponsor, but he said Tuesday he hopes to see more Republicans join him. 

Grothman said federal legislation is needed in part because many more such loans are made through online lenders who may be beyond the reach of state regulators, and because some states still have not passed meaningful regulations on such lending.

Even a Wisconsin law that took effect in 2011 limiting some forms  of high-interest loans hasn’t had as broad an impact as it could have, according to Pete Koneazny, litigation director for the Legal Aid Society of Milwaukee.

The Wisconsin law applies primarily to “relatively short-term loans” ranging from less than two weeks to a month, such as payday loans and auto-title loans. It also focuses only on the interest rate for a loan that “rolls over” at the end of its term, capping only that part of the rate at 36%.

As a consequence, he said, the lending industry in Wisconsin has instead turned to so-called installment loans with longer terms that put it outside the reach of the law — an outcome that critics of the 2011 law predicted, Koneazy said. “You really need an across-the-board cap on [rates for] high interest loans.”

In 2011, according to the first annual report on payday lending submitted by the state Department of Financial Institutions as a result of the state law, the average annual percentage rates for all payday loans in the state was 581.14%. By 2018, that rate had dropped to 485.53%.

Bankruptcy fodder

Visits to the Legal Aid Society by borrowers seeking legal help when they’re caught up in a problem loan are now “down to about once a month,” Koneazy said — not necessarily because fewer consumers are having problems, however. Other changes in state law, for example, have made it easier for title lenders to repossess a car used as loan collateral without going to court, so those borrowers haven’t sought representation.

Instead, today “we see them more often in bankruptcies,” Koneazy said of borrowers who have been trapped by high-interest, short-term loans

The federal legislation builds on the Military Lending Act, which caps interest rates on loans to active-duty service members at 36%. 

“But you have to ask yourself, if it’s immoral to give this type of loan to somebody who’s in the military now, how is it okay to give the loan to anybody else?” Grothman said.

Longtime industry critic

For Grothman, the measure builds on his long-standing opposition to high interest loans dating to his time in the Wisconsin state legislature. 

“I’m pretty much of a states’ rights person, pretty much of a libertarian when it comes to a lot of things,” he said. “But this is something that was regulated in this country 200 years ago. And it’s hard to imagine any way in which this business practice should be allowed.”

Assembly Minority Leader Gordon Hintz (D-Oshkosh) said Tuesday that when Grothman was a state senator, the two legislators worked together on legislation that touched on high-interest and predatory lending, including standing against measures that would have allowed  the rent-to-own industry to avoid complying with requirements of the Wisconsin Consumer Act.

“He was my best senate ally on all predatory [lending] issues,” Hintz (D-Oshkosh), told the Wisconsin Examiner. 

But Hintz also criticized Grothman for not speaking out against another Republican who he says has done serious harm to consumers, President Donald Trump.

“I think he’s sincere,” Hintz said of Grothman. “But I will say this: He still continues to champion a president who has been the best friend of the payday loan industry. I think if Congressman Grothman is serious, he should be calling out the repeal and erosion of the Consumer Finance Protection Bureau, and the rules that they passed.”