Credit card interest rates would be capped at 15% nationwide under a new federal usury law proposed on Thursday by Sen. Bernie Sanders (I-VT) and Rep. Alexandra Ocasio-Cortez (D-NY).
The pair’s Loan Shark Prevention Act draws upon a long tradition, not just in legislative politics but in human moral thought. Most major faith traditions have characterized usurious lending as a grave sin, and the background materials prepared by the populist pair make pains to reference the “special place in the Seventh Circle of Hell” such lenders are accorded in late-medieval depictions of the inferno.
“Today we don’t need the hellfire, the pitchforks, or the rivers of boiling blood, but we do need a national usury law that caps interest rates on credit cards and consumer loans at 15%,” a briefing document on the proposal states.
Average annual interest rates on credit card debt have climbed steadily in modern times and now stand at almost 18%. Many cards charge annual percentage rates as high as 27%, the supporting white-paper notes, adding that the finance and retail firms offering this high-cost credit have become alarmingly reliant on the interest income their uncapped charges generate.
Retail cards from major store chains like Macy’s and Kohl’s now account for more than a third of total company profits – a large enough chunk to paper over the sector’s struggle to maintain a sustainable trajectory on actual product sales volume. In an echo of the Wells Fargo account-opening fraud scheme that shattered the reputation of one of the country’s largest banks, retail firms have begun pressuring frontline workers to sell their high-cost credit cards to shoppers.
Outside the storerooms, in the traditional credit card spaces, the firms making money from the high rates targeted by Sanders and Ocasio-Cortez often turn out to have benefited directly from taxpayer bailouts at the nadir of the financial crisis a decade ago.
Additionally, the proposed legislation would also be a death blow for the openly predatory payday lending industry, which has typically escaped much in the way of federal regulation thanks to allies in both parties.
Those businesses, which tailor their offerings to strip more than $3 billion a year out of the poorest working people in the country by trapping a large but minority share of their customers in a vicious cycle of semi-permanent debt at triple-digit annual rates, have been riding high this year. With arch-conservatives empowered across President Donald Trump’s administration, even the modest federal regulations that were set to come online this year for payday lending have been shelved by the right-wing ideologues who now run the Consumer Financial Protection Bureau.
Sanders and Ocasio Cortez’s loansharking ban would crack the payday business model as it currently stands. Such lenders have successfully argued in the past that low-income communities would be worse off under strict usury caps because the expensive credit payday loans offer can be the only alternative in a financial emergency for people without access to a normal banking institution. While credit unions and other alternatives have shown it’s possible to serve that demand without charging the absurd 300%-and-upwards annual rate terms that payday loan documents obscure from desperate borrowers, the argument has nonetheless helped ward off state and federal oversight of the industry more than once.
The Loan Shark Prevention Act anticipates that argument and counters with the promise that such “unbanked” working families would gain access to reasonably-priced alternative credit when they need it – through the return of basic banking and lending services at the U.S. Post Office.
That idea, often referred to as postal banking, made its return as a fashionable policy idea in progressive circles five years ago after Sen. Elizabeth Warren (D-MA) — herself a 2020 competitor for the Democratic presidential nomination — drew new attention to it after progressive policy thinkers and journalists rescued it from a forgotten history. The new legislation from Sanders and Ocasio-Cortez would incorporate a bill Sanders wrote in 2013 to restore postal banking along much the same lines Warren had popularized in op-eds and speeches.
Postal banking never got over the line during Barack Obama’s presidency. But liberal legislators continued to work quietly with postal service unions and policy mavens to craft a legislative platform that would leverage the vast physical infrastructure of the USPS to cure the usurious predations of the payday lenders.
That delicate project was almost tipped on its ear in 2018 when Sen. Kirsten Gillibrand (D-NY) – another 2020 hopeful – introduced her own postal banking bill. Insiders and experts told ThinkProgress at the time that the junior New York senator had bypassed the back-channel work others had been pursuing on the issue, while praising the substance of her bill.
However robust the recent progressive work has been on both postal banking specifically and usurious lending in general, Sanders and Ocasio-Cortez are – characteristically – setting a new left flank in those policy conversations with this legislation.
A hard rate cap of 15% is far more aggressive as a policy tool than what some experts who’ve studied the way low-income people without bank accounts weather financial shocks. There’s a wide spectrum of recommendations on the subject. Center-aligned think tanks like the Pew Charitable Trusts, which has studied the payday lending business particularly closely, worry that rate caps might go too far, proposing regulatory tweaks to halve the rates lenders charge as a more roundabout alternative. Meanwhile, many left-leaning policy shops that favor such hard caps don’t go as far as the 15% mark at the heart of the Sanders-AOC bill.
But Sanders and Ocasio-Cortez each owe much of their popularity to this sort of willingness to push the envelope, in a stark stylistic contrast to the orthodox Democrats that tend to stake out territory in the moderate center at the outset of policy negotiations. Some of those old-guard party leaders have even found themselves carrying water for payday lenders when those businesses have faced serious political pressure.
“I am sure it will be criticized,” Sanders told the Washington Post ahead of a launch event with Ocasio-Cortez scheduled for noon Thursday. “I have a radical idea: Maybe Congress should stand up for ordinary people.”