By Christian Whittle

On July 29, Consumers’ Research Senior Fellow Professor Tom Miller, Jr. joined several witnesses to testify before the Senate Committee on Banking, Housing, and Urban in a hearing entitled “Protecting Americans from Debt Traps by Extending the Military’s 36% Interest Rate Cap to Everyone.”

Professor Miller testified on his research into the effects of imposing a 36% interest rate cap on loans across the U.S.

According to the Center for Responsible Lending, 18 states and Washington, D.C., have laws that limit short-term loan rates to 36% or lower. Federal lawmakers are considering replicating these laws on a national level to protect consumers from small-dollar loans with high-interest rates that some call “predatory.”

Mrs. Hollister K. Petraeus, Former Assistant Director for Servicemember Affairs at the Consumer Financial Protection Bureau, Ms. Ashley Harrington, Federal Advocacy Director and Senior Counsel at the Center for Responsible Lending, and Mr. Richard Williams, President and CEO of Essential Federal Credit Union argued in favor of extending the military’s 36% interest rate cap nationally.

Harrington argued that the extremely high interest rates charged by payday loan businesses were predatory and designed to keep consumers in a “debt trap.”

“Payday and car-title lenders charge around 300% APR and strip away nearly $8 billion in fees annually from people typically making just $25,000 a year. 75% of these business fees are generated from people stuck in more than 10 loans per year. This is the debt trap, and it’s how payday lenders succeed: by making sure their customers fail,” said Harrington.

Professor Miller argued that the rhetoric on interest rate caps does not match the arithmetic or the research.

“A high interest rate does not mean a high dollar cost to a consumer. Consider a loan for $300 to be repaid in three monthly installments of $120. The interest paid on this loan is $20 per month. Does $20 per month sound high or shocking, or unaffordable? The APR on this loan is about 118%, however. That might sound high and shocking, but the extra cost to the consumer is only $14 in interest per month as compared to a similar loan at 36% APR.”

Small-dollar lending also provides underbanked consumers with much-needed credit building products, Professor Miller explained. He argued that access to small-dollar lending products helps sub-prime consumers build their ability to become prime consumers and borrow from banks.

“Access to small-dollar loans helps consumers build and repair their credit rating, and so as they repay the loan, their credit scores improve. Every ladder has rungs. If the lowest credit rung is missing, how can consumers climb the credit building ladder?” said Professor Miller.

Professor Miller explained that a 36% rate cap would essentially eliminate this essential credit-building tool. The 36% cap renders small-dollar loans unprofitable, meaning lenders will not provide consumers with small-dollar lending products.

“A recent publication by the Federal Reserve shows that breakeven installment loan sizes are about $2,600 at a 36% APR. But suppose a consumer only needs to borrow $500 or $1,000? Access to these installment loan sizes is lost under a 36% interest rate cap. For a two-week payday loan for $100 at 36%, the interest paid is $1.38. In 2009, Ernst & Young studied this and found that the cost of producing a payday loan is about $14. The cost far exceeds the revenue, so under a 36% APR cap, consumer demand will continue to exist, but the legal supply will dry up,” said Professor Miller.

Professor Miller asked if the demand remains, what will consumers do?

“Perhaps people will delay going to the doctor, visiting the dentist, or taking a pet to the veterinarian. Perhaps they will not buy needed school supplies for their children. Perhaps they will defer necessary maintenance or repairs to their home or vehicle. These hardships have a real impact on people’s lives. Good credit really increases the quality of life,” said Professor Miller.

Bill Himpler, President & CEO of the American Financial Services Association, stressed the need for empirical data when attempting to extend the Military Lending Act’s interest rate caps nationally.

“Every report we’ve seen from the Defense Department since the enactment of the Military Lending Act in 2007 doesn’t cite any empirical data. The survey that [Sen. Chris Van Hollen (D-MD)] mentioned in the question [he] asked references a survey. It doesn’t even provide a reference to the data that is behind the survey itself. If we’re going to take legislation from a smaller segment of the population (I believe the military is about 1% of the population) and extend it to the entire population, we need to see the data. All we’re asking for is transparency,” said Himpler.

Watch the hearing here.

Below is Professor Miller’s OpEd on the need for research-driven policy at the Consumer Financial Protection Bureau:


Will Biden’s CFPB Nominee Run a Research-Focused Agency?

By Thomas W. Miller Jr.


Why is the Senate allowing the Consumer Financial Protection Bureau (CFPB) to drift away from Senator Elizabeth Warren’s original vision of a data-driven agency “with research at the core of all of its work?” Prudent regulators should not make policy based on mere beliefs, or on the findings of one or two studies.

During his confirmation hearing, no Senator pressed Rohit Chopra, President Biden’s nominee for Director of the CFPB, about how he plans to use research to underpin future CFPB decisions. Chopra’s 12-12 Committee vote indicates doubt. The full Senate must make an informed vote. To secure his confirmation, Chopra must assure a majority of the full Senate he can lead a data-driven Bureau. As he meets with Senators before his final confirmation vote, they should press him about his plans to generate and incorporate research at the CFPB.

If confirmed, Mr. Chopra would be one of the most powerful regulators in Washington, DC. Observers familiar with the agency expect a Chopra-led CFPB to act with a heavier hand than his predecessor.

Director Kathy Kraninger left Chopra a roadmap for a better CFPB. In January, Director Kraninger released a pivotal report from the Taskforce on Federal Consumer Financial Law that addresses access and inclusion issues that cut across ideological differences. The Taskforce Chair, Professor Todd Zywicki, said the report “will help provide guiding principles to advance the cause of consumer protection and inclusion for years to come.”

Who is against consumer protection and inclusion? If Mr. Chopra considers this report objectively and implements its recommendations, he could revolutionize consumer financial regulation for a generation.

The Taskforce tapped its 150 years of professional experience in consumer finance to create the two-volume report. Volume I explains the consumer’s need for credit products that include more users and minimize harm by giving regulators flexibility to monitor financial markets. Volume II contains 100 focused recommendations about moving forward. Together, the volumes can drive consumer financial policy for decades.

The report stresses the importance of innovation, access, and competition within the consumer credit industry. It gives the CFPB a compelling reason to foster more partnerships with researchers around the country to build a broad knowledge base to develop principles-based regulation. Such alliances can leverage the Bureau’s data and expertise to craft an abundance of fresh, useful research.

A mosaic of up-to-date, rigorous, replicable consumer finance research has value beyond academia. As I testified, “deliberate, empirically informed regulators can do much to preserve and expand consumers’ options” in financial markets.

The Taskforce’s findings form a bedrock that can guide considerable research on consumer finance issues. In turn, careful research can form the base of facts for every future CFPB rule.

One remarkable finding of the Taskforce is that “credit invisibility” does not change over time. That is, if you are young and do not have a recorded credit history, it is hard for you to establish a broad credit record as you age. That finding should unleash a flurry of researchers to determine why (or truly if) consumers have trouble shedding the albatross of credit invisibility.

Everyone expects ruffled feathers over specific Taskforce recommendations. For example, Fintech companies probably don’t like the idea of the CFPB being their primary regulator. Also, some Taskforce recommendations will rankle other federal agencies and the financial services industry — including banks.

Some policymakers, like Senators Elizabeth Warren and Sherrod Brown, called for disbanding the Taskforce before it even got off the ground. Detractors likely assumed the Taskforce would be a credit industry mouthpiece calling for Congress to dismantle the CFPB.

The detractors were wrong.

Instead, the Taskforce looked for inspiration from its predecessor, the National Commission on Consumer Finance, created by the Consumer Credit Protection Act of 1968. Its charge: conduct original research and provide Congress with recommendations about the regulation of consumer credit.

The Commission published the data, findings, and recommendations in a 1972 report. It wove together original data, information, and analyses. This work underpinned the report’s final recommendations and formed the bedrock for every significant legislative and regulatory change in consumer finance for nearly four decades.

But 2021 is not 1972. Research on consumer financial markets desperately needs an update. The financial environment has completely changed. To cite just two obvious changes: Revolving consumer credit and student debt have exploded in recent years. A slew of new financial products exists today. The CFPB has an opportunity and responsibility to study the recommendations made in the 2021 Taskforce report.

Director Kraninger built a group of strong leaders to guide the capable research staff at the CFPB. Members of the Senate should demand that Mr. Chopra makes the Taskforce Report the cornerstone of future research, rulemaking, and enforcement. This commitment would transform the CFPB from a partisan prize in political warfare into a regulator that truly works for all consumers.

Thomas W. Miller, Jr., is a professor of finance and holder of the Jack R. Lee Chair in Financial Institutions and Consumer Finance at Mississippi State University and a Senior Research Fellow at Consumers’ Research.