IA: Comment Letter to Iowa Division of Banking on Review and Modernization of Iowa Consumer Finance Licensing Statutes

Zachary D.A. Hingst

Legislative Liaison & Legal Counsel

Iowa Division of Banking

200 E. Grand Ave. Suite 300

Des Moines, Iowa 50309

Re:       Review and Modernization of Iowa Consumer Finance Licensing Statutes

Dear Mr. Hingst,

On behalf of The American Fintech Council (AFC),^[1] I am providing comment on the Iowa Division of Banking’s (IDOB or Agency) review and modernization of Iowa’s consumer finance licensing statutes.

AFC’s mission is to promote an innovative, transparent, inclusive, and customer-centric financial system by fostering responsible innovation in financial services, and encouraging sound public policy. AFC members are at the forefront of fostering competition in consumer finance and pioneering ways to better serve underserved consumer segments and geographies. Our members are also improving access to financial services and increasing overall competition in the financial services industry by supporting the responsible growth of lending and lowering the cost of financial transactions, allowing them to help meet demand for high-quality, affordable financial products.

AFC is encouraged by IDOB’s efforts to improve the consumer lending environment for Iowans by reviewing and modernizing its consumer finance licensing statutes, specifically the Regulated Loan Act (Iowa Code Chapter 536) and Consumer Credit Code (Iowa Code Chapter 537). To that end, AFC has provided the below recommendations on how the Agency can effectively modernize the aforementioned statutes to ensure that Iowa consumers are effectively served by responsible lenders. We appreciate IDOB’s consideration of our recommendations as it completes its review of Iowa’s consumer finance licensing statutes.

I.              AFC Recommends Establishing a flat 36 Percent Interest Rate Cap on Loans to Improve Access to Financial Services

As a trade, and consistent with national consumer advocates, the AFC has supported a 36% annual percentage rate (APR)standard at the state and federal level. We have worked tirelessly with consumer advocates and state legislatures in Illinois, New Mexico, California and many other states on legislative proposals and new regulatory frameworks that provide clarity for lenders and options for consumers. Further, AFC has consistently identified the positive impact that establishing a flat 36 percent APR has on historically underserved communities, including rural and minority communities and those with damaged or minimal credit histories.

By raising Iowa’s interest rate cap to a flat36 percent APR, access to credit could be significantly improved for Iowa consumers. According to an analysis of AFC members’ lending practices, only about 10,000 Iowa consumers are currently served each year by responsible credit offered by our member companies. This lack of credit access is further exemplified when compared to consumers in similarly situated markets that allow for AFC members to lend at a flat 36 percent.^[2] Based on our comparative analysis, we found that approximately 250,000 Iowa consumers could be served if the IDOB modernized Iowa’s interest rate cap to a flat 36 percent APR.

As evidenced by the findings of our analysis, Iowa consumers would significantly benefit from a flat 36 percent APR. Specifically, individuals who have been historically underserved by traditional financial institutions would see the greatest benefit due to an increase in Iowa’s interest rate cap. This is due to the fact that consumers with damaged or minimal credit history often experience higher interest rates. Within the current interest rate environment, even consumers with perfect or near-perfect credit histories receive interest rates above 24percent on their credit cards. Thus, those with damaged or minimal credit histories are unable to access responsible credit options offered by AFC members in this credit environment. To ensure that those communities that have been historically excluded from the financial services industry, including those with damaged or minimal credit histories, it is imperative to increase Iowa’s interest rate cap to a flat 36 percent APR.

Therefore, AFC recommends that IDOB consider amending its consumer finance licensing statutes to raise its interest rate cap to a flat 36 percent APR.

II.           AFC Recommends Establishing Clear, Characteristic-Based Definitions for “Credit Products” and “Non-Credit Products” within Iowa’s Consumer Finance Licensing Statutes

The current Iowa Consumer Credit Code does not define “credit products” and “non-credit products”. To ensure proper legal categorization of the varied financial products that exist in the modern financial services ecosystem, it is important to have clear and conspicuous definitions of both credit and non-credit products within the statute underpinning Iowa’s consumer finance licensing regime.  AFC has consistently advocated for modernizing statutes and regulations to encourage innovation. To that end, AFC believes that establishing prudent, informed definitions for credit and non-credit products will help in this endeavor.

AFC recognizes that there may be many ways that reasonable people might define the term “credit products” in various contexts. However, our view is that IDOB should define credit and non-credit products within its statute in a manner that clearly distinguishes between the two categories on the basis of distinct characteristics. Credit products are understood, by nature, to be predicated by a consumer taking on funds based on the promise of future earnings. Lenders assessor underwrite an individual and ascertain their ability to repay the debt based on empirical data captured in a consumer’s credit report and a pre-calculated credit score. Further, lenders have recourse for unpaid debts and can seek repayment through debt collection.

In contrast, non-credit products within the modern financial services ecosystem are transactions predicated by a consumer taking on funds based on existing earnings or account holdings. These transactions typically do not have recourse towards the consumer by the financial institution facilitating the transaction if the funds are not repaid. Further, non-credit products do not perform credit checks or underwrite a consumer or charge late fees or interest.

Thus, AFC recommends that the IDOB define these credit products as those products that include all of the following features: 1) availability is based upon a provider’s assessment of the applicant’s creditworthiness through the underwriting of ability-to-repay and empirical data captured in a credit report and/or credit score; 2) recourse, meaning that the applicant will be required to repay the amounts advanced in full whether or not access to previously-earned funds is successful; 3) debt collection efforts may be pursued by the provider to seek unpaid amounts; and 4) periodic-rate finance charges/interest and/or late fees may be assessed to the consumer.

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AFC appreciates the opportunity to provide comment on IDOB’s review and modernization of Iowa’s consumer finance licensing statutes. Given the above information, we believe that our recommendations would significantly improve the lending environment in Iowa for the benefit of its citizens. We thank you for the consideration of our recommendations and look forward to working with you on any further modernization efforts.

Sincerely,

Ian P. Moloney

SVP, Head of Policy and Regulatory Affairs

American Fintech Council

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[1] American Fintech Council’s (AFC) membership spans EWA providers, lenders, banks, payments providers, loan servicers, credit bureaus, and personal financial management companies.

[2] AFC’s analysis reviewed member data on lending practices in Iowa and conducted a comparative analysis members’ lending practices in Iowa to their lending practices in Kansas, Oklahoma, and South Dakota. The variables used to evaluate likeness between states were geographic region, population size, median household income, rate of college degree attainment, homeownership rate, and poverty rate. Data was pulled for each state and calculated against the total population of the state to obtain the approximate percent of consumers served in the state, with the assumption that each loan was to a new consumer. The percent of consumers served provided the likely range that similarly situated states could expect by allowing AFC members to lend at 36 percent APR. From this data, a sensitivity analysis was conducted to show the range of the population that would likely be served if AFC members could lend up to 36percent APR. Findings discussed above are based on the conducted sensitivity analysis.