Personal finance

Big Bank CEOs Are Open to the Idea of a Federal 36% Interest Rate Cap on Consumer Loans

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The heads of major U.S. banks on Wednesday expressed tentative support for a federal interest rate cap on consumer loans, which would likely include payday and auto title loans. 

During a Wednesday hearing held by the Senate Committee on Banking, Housing, and Urban Affairs, Senator Jack Reed, D-R.I., asked the CEOs of Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Wells Fargo if they would support a 36% cap on interest rates on consumer loans like payday loans. 

The bank CEOs did not immediately reject the idea. "We absolutely don't charge interest rates that high for our customer basis," Citi CEO Jane Fraser said in response to Sen. Reed's question. She added that Citi would like to have a look at the law, just to make sure there are no unintended consequences to it. "But we appreciate the spirit of it and the intent behind it," she said. 

The CEOs of Chase, Goldman and Wells Fargo agreed they'd like to look over any final legislation, but all expressed openness to the idea. 

David Solomon, CEO of Goldman Sachs, said that he wanted to ensure that a "materially different interest rate environment" didn't close off lending to anyone. "But in principle, we think it's good to have this transparency and to look carefully at this," he said. 

Brian Moynihan, CEO of Bank of America, said that he also understood the "spirit" of the law.

Currently, 18 states, along with Washington D.C., impose a 36% rate cap on payday loan interest rates and fees, according to the Center for Responsible Lending. But Sen. Reed, along with Sen. Sherrod Brown, D-Ohio, previously introduced legislation in 2019 that would create a federal 36% interest rate cap on consumer loans. Sen. Brown told Reuters earlier this week that he plans to re-introduce the bill.  


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In the states that allow payday lending, borrowers can generally take out one of these loans by walking into a lender and providing just a valid ID, proof of income and a bank account. Unlike a mortgage or auto loan, there's typically no physical collateral needed and the borrowed amount is generally due back two weeks later. 

Yet the high interest rates, which clock in over 600% APR in some states, and short turnaround can make these loans expensive and difficult to pay off. Research conducted by the Consumer Financial Protection Bureau found that nearly 1 in 4 payday loans are reborrowed nine times or more. Plus, it takes borrowers roughly five months to pay off the loans and costs them an average of $520 in finance charges, The Pew Charitable Trusts reports

Major banks are not totally unbiased on the subject of small-dollar loans. Although banks generally don't provide small-dollar loans, that is changing. In 2018, the Office of the Comptroller of the Currency gave the green light to banks to start small-dollar lending programs. Meanwhile, many payday lenders contend that a 36% rate cap could put them out of business, potentially giving banks an advantage. If payday lenders ceased to operate because of a federal rate cap, it could force consumers to utilize banks offering these loans.

In May 2020, the Federal Reserve issued "lending principles" for banks to offer responsible small-dollar loans. Several banks have already jumped into the business, including Bank of America. Other banks represented on the panel have not rolled out any small-dollar loan options yet.

Last fall, Bank of America introduced a new small-dollar loan product called Balance Assist, which allows existing customers to borrow up to $500, in increments of $100, for a flat $5 fee. The APR on the product ranges from 5.99% to 29.76%, depending on the amount borrowed, and customers have three months to repay the loan in installments. 

One of the reasons Bank of American created the Balance Assist product, Moynihan said Wednesday, was to help customers avoid the payday lenders.

While advocates claim capping interest rates on payday loans protects consumers from getting in over their heads with these traditionally high-cost loans, opponents maintain that these types of laws will reduce access to credit by forcing lenders out of business with unsustainable rates, leaving people nowhere to turn when they're short on cash.

Recent research contends that consumers may be best served by rules that require lenders deny borrowers any new loans for a 30-day period after they've taken out three consecutive payday loans, rather than implementing a cap on interest rates.

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