Interest Rate Caps Threaten Credit Access and FinTech Partnerships

There have been pockets of momentum to curb interest rates charged for balances credit cards and for loans extended by FinTechs.

But the impact may be one where lending is actually curtailed, particularly as a few states have sought to winnow down rates lenders can charge — effectively moving them to navigate a patchwork of state-by-state lending laws.

Earlier this year, and as reported by PYMNTS, Sens. Bernie Sanders, I-Vt., and Josh Hawley, R-Mo., introduced a bill that would cap credit card interest rates at 10% — starting at the time of the bill’s passage and for the five years following that event. President Donald Trump had embraced a similar cap during last year’s presidential campaign.

At the State Level

In Virginia, a bill was passed in the state House and Senate last month, (and now making its way to the governor’s desk where it would be signed or vetoed), capping interest rates on a broad swath of loans, including earned wage access and other offerings.

In looking at the language of the legislation itself, the language takes note of loans through which an end users “receives a cash advance” for an amount that is “based, by estimate or otherwise” on the individual’s income and if the repayment is automatic through debit, ACH or payroll deduction or other means. If codified, the law would take effect in July and cap the interest rates on those loans.

The bill also takes note of loans made through third-party arrangements, which would impact FinTech-bank partnerships.

Last week, in Colorado, the Federal Deposit Insurance Corp. withdrew its amicus brief that challenged a 2023 opt-out law — through which the state would have applied interest rate caps on loans made from out-of-state banks to borrowers in Colorado, regardless of where the bank was chartered.

A federal court had ruled that the loan was “made” where the bank was, rather than where the borrower was based; a preliminary injunction held the state from enforcing the “opt out” function and enforcing the lower interest rates on the out-of-state lenders, where rates reportedly would have been as low as 15%.

By withdrawing the amicus brief, the FDIC is effectively stating that the loans are made where the lenders are based, and thus are tied to those home-state rates.

The Impact of Caps

The impact on lenders operating through those partnerships and across different states is thus far murky — but it could curb who gets access to credit and may disproportionately impact borrowers in lower-credit-scoring cohorts, particularly in subprime.

In a letter last week, the American FinTech Council urged the vetoing of the Virginia legislation, contending that the legislation “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 [and] potential legal disputes.”

In a 2023 paper discussing the impact of an Illinois state 36% cap on credit (via unsecured installment loans), the authors, including Gregory Elliehausen of the Federal Reserve’s Board of Governors, wrote that the impact was most keenly felt by subprime borrowers, where the number of loans to subprime borrowers declined by 38% and increased the average loan size to subprime borrowers was cut by 35%.

The read across is that banks would find it less economically viable to offset risk via higher rates and might even curtail new credit offerings, In the event that credit access remained the same, banks might raise fees elsewhere to compensate for the caps.