Banking Groups Push Back on Credit Rate Cap That Threatens Nonprime Lenders

When Congress is discussing capping credit card and loan fees, the banking industry listens. The Protecting Consumers from Unreasonable Credit Rates Act (S. 2781) would cap annual percentage rates (APRs) at 36%.

The American Bankers Association (ABA) and seven other trade groups say that it might sound fair. But they argue it could hurt borrowers with less-than-perfect credit.

The ABA warned the bill would deprive working families and low-score borrowers of affordable credit. The groups say that a national cap ignores how risk-based pricing works. Lenders use higher rates to balance greater risk. Lacking them, they may stop offering subprime credit.

The Credit Squeeze

Small-dollar lenders and fintechs could feel the biggest pinch. These lenders cater to the nonprime market. Risky borrowers pay higher rates. A 36% limit might make it difficult for subprime lenders to cover costs, including compliance, fraud protection, and servicing. A rate cap may force a cut to loan approvals.

Large banks might pull back. They might reprice cards, reduce rewards, and trim limits if the cap covers all consumer credit. The ABA says this would harm innovation as well as reduce competition. A three-month $500 loan typically costs $55 to originate. That’s an effective 44% rate — illegal under the bill.

A Familiar Fight

Washington has debated interest rate caps for a long time. Many proposals tie to payday lending. This bill goes further. It targets all consumer credit products — credit cards, personal loans, even buy now, pay later (BNPL) financing.

Bill supporters say it protects consumers from predatory loans. They say payday loans average about 400% APR. Car title loans often reach 300%. Even worse, overdraft loans are even more expensive on an annualized basis.

A 2006 law shields military families by capping rates at 36%. Backers say extending that rule would provide protections for all borrowers.

Why It Matters for Subprime Lenders

This bill may extend the wait for nonprime borrowers. They’ll have limited options. Lenders may approve less money and turn to secured loans. The trickle-down effect may initially affect poor neighborhoods. Nonprime borrowers may end up paying nosebleed rates.

According to Experian, approximately 42% of American consumers are considered nonprime. These borrowers already pay higher rates of interest. That alone is bad. Now, a national rate cap may prevent predatory rates. But it could very well restrict credit access for high-risk borrowers.