On Thursday, the Senate Banking Committee, led by Chairman Sherrod Brown (D-Ohio), is hosting a hearing titled, “Protecting Americans from Debt Traps by Extending the Military’s 36% Interest Rate Cap to Everyone.”

Don’t let the noble-sounding title fool you. If Congress and President Biden approve of extending the Military Lending Act’s (MLA) 36% rate cap for all consumers, not just military veterans, this would devastate the financially vulnerable by reducing their access to credit. It could very well push our most disadvantaged citizens to underground financial products in an unregulated, shadow economy.

Sen. Brown reportedly believes he can overcome the 60-vote filibuster threshold. But the committee’s leading GOP member, Sen. Pat Toomey (R-Pa.) reportedly plans to block it—as he should. 

“Proponents believe a cap on fees and interest would help consumers, especially subprime borrowers with less-than-perfect credit histories, by limiting what they pay on payday loans and other less-regulated short-term credit,” Credit Union National Association (CUNA) and other coalition members wrote in a letter to the Committee last week. “In reality, its impact would extend far beyond payday lenders to the broader consumer credit market to cover affordable small dollar loans (including “accommodation” loans) that depository institutions are being encouraged to offer, credit cards, personal loans, and overdraft lines of credit. As a result, many consumers who currently rely on credit cards or personal loans would be forced to turn elsewhere for short-term financing needs, including pawn shops, online lenders—or worse—loan sharks, unregulated online lenders, and the black market.”

CUNA also stated that a 36% rate cap, however calculated, “will mean depository institutions will be unable to profitably offer affordable small dollar loans. For a loan product to be sustainable, depository institutions must be able to recover costs.”

As my colleague, Patrice Onwuka explained recently,

Short-term loans are extremely important to minority communities across America because they are frequently our only available source of credit. According to the FDIC, small-dollar borrowers tend to be ‘lower-income households, less-educated households, younger households, black and Hispanic households, working-age disabled households, and households with volatile income.’

Minorities are disproportionately unbanked or lack access to traditional banking services, which is why they rely on small-dollar loans and alternatives. Many black and Hispanic people believe that big banks are not here to help them, so they look elsewhere to meet their personal and small business credit needs. In theory, rate caps save consumers money by limiting the amount of interest an alternative lender can charge. But in practice, such laws force small-dollar loan lenders out of business, and in doing so expose consumers to greater financial risk and force underbanked minorities to use more costly alternatives that will leave them even worse off financially.

Thomas Miller Jr., professor of finance at Mississippi State University, wrote that “A 2013 Pew Charitable Trusts survey found that more than 60 percent of payday loan users would have to delay paying other bills without access to these loans. The alternative to short-term loan debt is being indebted to existing creditors—where failure to pay might mean losing access to utilities, like water and electricity.”

If Senate Democrats are successful at enticing enough anti-free market Republicans to sign onto this bill, they could be leaving America’s most vulnerable people out in the cold.