Proposed “All-In APR” Throws the Baby Out With the Bathwater
Last week Senate Democrats, led by Senator Dick Durbin (D-IL), introduced legislation directed at the consumer credit industry. Touted as a curative for the systemic harm caused by generations of predatory lending, the Protecting Consumers from Unreasonable Credit Rates Act of 2021 proposes a new “All-In APR” of 36%. This rate cap would apply to all open-end and closed-end consumer credit, including mortgages, car loans, overdraft loans, title loans and payday loans.
The bill’s sponsors don’t think much of the consumer finance business. In a July 14th press release, Senator Durbin’s office decried the “predatory business model [that] exploits hard-working Americans, trapping them in long-term debt cycles that drain bank accounts and cause serious, long-term financial harm.” The bill itself recites a litany of presumed abuses in a belligerent, yet surprisingly vague, indictment of an industry that, according to the bill’s authors, has been misbehaving “since colonial times.”
In addition to establishing a national maximum interest rate for consumer credit, the proposed law redefines what counts as interest. Here’s a hint: darn near everything counts. The All-In APR is nominally modeled on the Military Lending Act, which governs credit transactions with active duty military and their families. The statute sets a maximum “Military APR” of 36%, including credit insurance premiums and fees for ancillary credit-related products, which are recast as “finance charges” for purposes of calculating rate. The authors of the new bill must have looked at the Military APR and thought, “Good start, now somebody hold my beer.” They adopted a supersized version that defines as interest “all charges payable, directly or indirectly, incident to, ancillary to or as a condition of the extension of credit,” among them the following:
Credit insurance premiums, whether the insurance is mandatory or optional
Charges and costs for ancillary products sold in connection with or incidental to the credit transaction (whether or not the ancillary product is “credit-related”)
Any fees for default or breach of the credit agreement, such as late fees, NSF fees, overdraft fees and over limit fees; however, late fees and NSF fees are permitted to the extent authorized by state law, provided they do not exceed $20/month and $15/month respectively
By capping the allowable interest rate and then reimagining virtually every charge - including premiums and fees for voluntary products - as interest, the bill aims to fundamentally reshape consumer credit. An All-In regime of this type would drastically reduce the ability of lenders to offer products beyond basic installment credit. Popular ancillary offerings such as GAP, debt cancellation agreements, and even service contracts, crowded the table by a tortured reimagining of what constitutes a finance charge. At its core, the Protecting Consumers from Unreasonable Credit Rates Act is a denial of the right to contract. It is a nanny state prescription that disregards consumer choice in favor of formulaic restrictions dreamed up by well-meaning people who most likely will never feel its effects.
