Virginia Legislation Designed To Cap Interest Rates On Credit

The State of Virginia is considering legislation designed to limit the interest charged on credit to consumers.

The Federal government is also reviewing a similar approach to credit cards, but once again, policymakers are looking to apply price-fixing to a market driven by supply and demand.

The current language of SB 1252 sets an interest rate cap of 12%. To quote the bill:  Except as otherwise permitted by law, no contract shall be made for the payment of interest on a loan at a rate that exceeds 12 percent per year. There are exceptions included in the legislation, including motor vehicle title lenders, short-term loans, and others.

The American Fintech Council (AFC) has distributed a statement asking Virginia governor Glenn Youngkin to veto the bill.

Phil Goldfeder, CEO of the American Fintech Council, predicts the legislation could reverse years of progress pertaining to financial inclusion:

“SB 1252 would cut off hundreds of thousands of Virginians from safe and responsible credit products, pushing them toward more costly and less regulated alternatives. Responsible fintech companies and innovative banks have worked collaboratively with regulators to expand financial access in Virginia, but this bill would undo that progress and harm consumers without providing any clear consumer protection benefits. We strongly urge Governor Youngkin to veto this bill to protect Virginia families and preserve competition in the state’s financial services market.”

AFC states that if “SB 1252 is signed into law, many of these consumers will lose access to these responsible credit options, creating unnecessary financial hardship.”

The legislation potentially “creates an unclear and legally questionable policy framework,” adds Ian P. Moloney, SVP and Head of Policy and Regulatory Affairs at AFC.

“This bill lacks clarity on how responsible Fintech companies and their bank partners can operate in Virginia, leading to costly implementation challenges for Virginia’s banking regulator, potential legal disputes, and a waste of government resources and Virginia taxpayer dollars. Rather than creating uncertainty, policymakers should focus on clear and consistent regulations that ensure consumer protection while allowing responsible lenders to serve the market.”

Most lending is driven by benchmark rates and an assessment of risk. More risky borrowers are charged a higher cost of money to accommodate a higher risk of default. If too many borrowers default on loans, a lender would alter its crediting decisions but capping a rate defies market forces potentially creating a situation where the only option is no credit at all for riskier customers. Of course, if some lenders exit a market, others will step in but this could lead to less reputable lenders taking over. Perhaps a loan sharking business.

Regardless, the market always wins, and price fixing has been proven time and again to do more harm than good.