CFPB (the Bureau) defines “covered longer term loans” that will be subject to its proposed new rule2 as loans that (a) have a term of more than 45 days, (b) involve lender charges at an all-in APR over 36%3 , and (c) require a “leveraged payment mechanism” of either access to the consumer’s bank account or a lien on the consumer’s vehicle. The rule imposes significant burdens on lenders, ranging from a rigorous additional layer of regulatory underwriting to restrictions on refinancing and burdensome recordkeeping. The rule will very likely constrain the eligible borrower pool and thereby constrain revenue.
The selection of 36% yield (however computed) as a trigger for these burdens is very important, both to industries that will be affected and to consumers who may face denial of access to credit. But the Bureau has published no research to support this choice. Rather, it is based solely on a Congressional edict in the Military Lending Act, a 2007 law that imposed a 36% all-in usury limit on loans to service members and their families.
This paper looks at a dataset of 1.1 million installment loans made at a wide range of interest rates (under 10% to over 800%), including both online and storefront origination platforms, in order to ask whether 36% is in fact a point at which the harmful lender behaviors alleged by the Bureau begin to occur.