Nebraska voters have overwhelmingly chosen to limit the interest rates that payday lenders can charge, making it the 17th state to limit interest rates on risky loans. But consumer advocates have warned that future payday loan protections may need to be put in place at the federal level due to recent regulatory changes.
With 98% of districts reporting, 83% of Nebraska voters approved Initiative 428, which will cap annual interest charges for deferred deposit services, or payday loans, at 36%. On average, payday lenders charge 400% interest on small loans nationwide, according to the Center for Responsible Lending, a consumer advocacy group that supports broad industry regulation.
By approving the ballot measure, Nebraska became the 17th state in the country (plus the District of Columbia) to put in place a cap on payday loans. The crushing vote in a state where four of its five electoral votes will go to President Donald Trump – the state divides its electoral votes by Congressional constituency, with Nebraska’s second largest district voting for former Vice President Joe Biden – shows that the issue could garner bipartisan support.
“It is not a highly regulated, leftist state,” said Noel Andrés Poyo, executive director of the National Association for Latino Community Asset Builders, a Latin American business advocacy group.
“The people of Nebraska on average aren’t very keen on limiting the financial services industry,” Poyo added. “But when you ask evangelical Christians about payday loans, they object to it.”
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Industry officials have argued that the ballot measure will hamper consumers’ access to credit and said the rate cap means lenders will not be able to operate in the state.
“It is like eliminating regulated small dollar credit in the state while doing nothing to meet the very real financial needs of Nebraskans, including in the midst of the COVID-19 pandemic and economic downturn,” Ed said. D’Alessio, Executive Director of INFiN, a national trade association for the consumer financial services industry.
The success of the ballot measurement in Nebraska could portend similar efforts in other states. Colorado and South Dakota are other states that have capped the interest charged by payday lenders in recent years through voting measures like Nebraska’s.
“It transcends political ideology,” said Ashley Harrington, federal director of advocacy at the Center for Responsible Lending. “There is just something wrong with triple digit interest rates and trapping people in debt cycles.”
The experiences in these states add further support to initiatives to cap interest on small loans. In South Dakota, the volume of alternative unsecured and payday loans offered by credit unions, which are subject to an 18% and 28% rate cap, has grown significantly since the ballot measure was passed. in 2016, studies have shown. And polls show continued support for the interest rate cap on payday loans among a large majority of South Dakotas.
Federal regulators loosened limits on payday lending industry
Despite the measure’s success in Nebraska, changes at the federal level could weaken efforts to regulate the payday lending industry and cap the interest rates it charges.
In July, the Consumer Financial Protection Bureau released a new rule repealing provisions of a 2017 rule that required payday lenders to determine whether a person will be able to repay their loans. Critics of the payday industry have long argued that high loan interest rates cause people to spiral into debt, whereby they have to borrow new loans to pay off existing payday loans.
NALCAB, which is represented by the Center for Responsible Lending and Public Citizen, filed a lawsuit in federal court last week against the CFPB seeking to overturn the new rule.
Meanwhile, the Office of the Comptroller of the Currency, which regulates national banks, finalized the “real lender” rule last month. This new regulation allows non-bank lenders, such as payday lenders, to partner with banks to provide small loan amounts. Since the loans would be made through the bank, they would not be subject to government-imposed interest rate caps. Critics have called the new regulation a “rent-a-bank” system and say it could harm consumers.
“It’s not a loophole, it’s a gaping tunnel,” said Poyo, criticizing the new OCC regulations.
If Democrat Joe Biden wins the presidential election, his administration would take over the leadership of the CFPB and OCC and could reverse these new policies, Poyo said.
However, Harrington argued that the federal government should go further and create a federal cap on interest rates. Even though control of Congress remains divided between Democrats and Republicans, Harrington said lawmakers should learn from the success of the voting measures in Nebraska and South Dakota.
“Everyone should be able to get safe, affordable consumer loans that don’t have triple-digit interest rates,” Harrington said.