Alexandria Ocasio-Cortez will announce her first major bill today, in partnership with Vermont Sen. and presidential candidate Bernie Sanders. It’s something Sanders has proposed for many years: a 15 percent interest rate cap on all consumer loans, which would reduce what many Americans pay on their credit cards and effectively eliminate the payday loan industry.
The bill is called the Loan Shark Prevention Act, and it’s only two pages long. It includes language that would prevent lenders from adding fees to “evade” the interest rate cap and sets penalties for violators, including a forfeiture of all interest on the illegal loans.
According to Ocasio-Cortez’s office, the freshman representative plans to suggest postal banking as a public option for consumer lending, though that is not in the legislation. A postal lending option would in theory minimize the impact on access to credit from the rate cap. Sanders endorsed postal banking during his 2016 presidential campaign.
The interest rate cap, often referred to as a usury cap in a reference to the biblical term, has been a mainstay of Sanders’s left-wing agenda. He introduced similar legislation as far back as 2009, when Congress was debating the CARD Act, which added some more modest protections for credit card holders. While the 2009 bill specifically focused on credit cards, by 2016 Sanders had added all consumer loans to the plan.
“Today’s loan sharks wear expensive suits and work on Wall Street, where they make hundreds of millions of dollars in total compensation by charging sky-high fees and usurious interest rates,” Sanders and Ocasio-Cortez said in a statement accompanying the plan.
The federal rate cap would nullify a critical 1978 Supreme Court ruling in Marquette National Bank v. First of Omaha Service Corp. At the time, most states had some sort of usury cap in place, dating back to the National Bank Acts of 1863-64. The high interest rates of the late 1970s increased bank borrowing costs, but the caps protected consumers from enduring the same rates.
Amid much clamor from bank lobbyists and free marketeers, First National Bank of Omaha, as was customary at the time, mailed out unsolicited credit cards across the country. The terms on these complied with Nebraska’s higher interest rate cap but violated the laws of the states that First National mailed them into. The court had to answer: When a credit card offer is made, does the bank’s home-state interest rate or the borrower’s home-state interest rate apply? Arguing for First National was notorious conservative lawyer, and future failed Supreme Court nominee, Robert Bork.
The court unanimously chose the bank’s home state, and this revolutionized consumer lending. A handful of states lifted their usury caps entirely to entice banks to move their headquarters, most notably South Dakota and Delaware (in case you were wondering why your credit cards come out of those two states). Banks took the offer and could therefore export high interest rates anywhere in the country. Other states had usury laws on the books, but the Marquette decision made them irrelevant. (That’s also how Delaware’s Joe Biden became known as “the senator from MBNA,” and why Republicans regularly push to allow consumers to purchase health insurance “across state lines” — all of the insurers would set up shop in Delaware, or another low-regulation state, and sell junk plans from there, freed of state regulators elsewhere.)
The Sanders and Ocasio-Cortez proposal would allow the Federal Reserve Board to increase the rate cap for a period of 18 months but only if there are adverse circumstances threatening the “safety and soundness” of the financial system. Credit unions are exempt from this bill because a 1980 law already caps credit union interest rates to 15 percent. However, the National Credit Union Administration has used the “safety and soundness” provision since the cap was enacted; from a high of 21 percent in the 1980s, today it sits at 18 percent.
The real consumer savings from the Loan Shark Prevention Act would come from other short-term, small-dollar loans, which in an age of precarious finances at the low end have become commonplace. Payday loans carry annual percentage rates as high as 667 percent.
The Consumer Financial Protection Bureau recently gutted protections for payday lending customers that would have forced lenders to consider ability to repay before issuing the loan.
When Sanders made a similar proposal in 2016, bank trade publications warned that the plan would reduce access to credit for low-income families. No payday lender would offer a 15 percent rate for its services, at least not for anyone deemed a credit risk. The most aggressive consumer groups seeking changes to payday lending laws have asked for a 36 percent cap, as it exists in several states.
At a time when 40 percent of Americans don’t have $400 on hand for an emergency, demand for short-term loans would still exist. But if nobody will lend to such families at 15 percent, how will they cope? Will they go from loan sharks in three-piece suits to actual loan sharks?
The answer, to Ocasio-Cortez and Sanders, is postal banking, which several Democratic presidential candidates have endorsed. Letting the nation’s 31,000 post offices issue simple bank accounts and even short-term loans would solve numerous problems, particularly for the over one in four households who have little or no access to banking services, which lead them to use high-cost alternatives. Returning to a postal banking system, which as many as 4 million Americans enjoyed when it was in place from 1911 to 1967, could promote financial inclusion, save billions of dollars for vulnerable populations, and help modernize and stabilize the postal system — a nationalized entity written directly into the Constitution — in an era of electronic communication.
“We must make sure that giant Wall Street financial institutions are not the only way Americans can gain access to banking services,” the Sanders and Ocasio-Cortez statement reads. “Together, we are going to put predatory lenders out of business and provide affordable banking options to all Americans.”
The 2016 collective bargaining agreement between the U.S. Postal Service and the American Postal Workers Union included the rollout of postal banking pilot programs, but the Postal Service never enacted them. Those pilot programs would not have included short-term lending; that would likely require legislation.
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