July 26, 2021

Serious concerns lurk under surface of loan shark joke

The growing movement to impose 36 percent interest rate caps on retail installment loans received a rousing endorsement last week from the National Association of Loan Sharks, “the preeminent trade association for illegal moneylenders.”

Though an April Fools’ Day joke orchestrated by the American Financial Services Association, the April 1 press release reflects serious industry concerns that interest rate caps restrict financing opportunities for customers on the lower end of the credit spectrum at a vulnerable economic time.

The tongue-in-cheek release highlights how a slate of rate cap legislation could expand opportunities for the fake loan shark association’s members.

“These proposals are awful for consumers but great for our business model, ensuring tens of thousands of consumers will not have access to ethical and reliable traditional installment loans, and are now forced to turn to us,” a supposed spokesperson said in the release. “We welcome the opportunity to serve these consumers in the gray market, with astronomical costs, no reporting to credit bureaus and no regulatory oversight whatsoever.”

Illinois Gov. J.B. Pritzker in March signed a rate cap bill into law, which applies to all loans below $40,000 extended in the state. Guaranteed asset protection products sold on automobile purchases are included the interest rate calculation.

The Illinois General Assembly passed the act in January as part of a broad initiative by the Legislative Black Caucus to curb racial inequities in lending. The law borrows heavily from the federal Military Lending Act, which contains the same interest rate cap for service members and covered relatives. New Mexico’s version of the bill died last month.

Though very few vehicle sales transactions originate at interest rates exceeding 36 percent, particularly on the new-car side, industry leaders at AFSA are joined by the National Automobile Dealers Association in voicing concerns, particularly when it comes to the inclusion of finance and insurance product sales in the interest rate calculation.

Industry leaders say consumers hard-pressed for cash may be forced to dive into shark-infested waters if they are unable to qualify for traditional loans.

This keeps the sharks fed, per AFSA’s April 1 release: “Thanks to ill-informed politicians we’ll be able to set the terms and get these folks into a cycle of debt for months if not years.”