Should credit-card interest be capped at 15%?
Religion & Liberty Online

Should credit-card interest be capped at 15%?

Democratic presidential primary contender Senator Bernie Sanders and Representative Alexandria Ocasio-Cortez have unveiled a plan to cap credit-card interest rates at 15%:

Under the “Loan Shark Prevention Act,” the annual percentage rate applicable to any extension of credit would not be allowed surpass 15% on “unpaid balances, inclusive of all finance charges” or “the maximum rate permitted by the laws of the State in which the consumer resides.”

Consumer debt, and credit card debt in particular, is something many Americans struggle with and both the amount of total debt as well as the interest rates have escalated in recent years:

The median credit-card interest rate was 21.36% as of last week, compared with 12.62% a decade ago, according to Meanwhile, Americans collectively hold more than $1 trillion in credit-card debt, according to the Federal Reserve.

Many churches have sought to help those struggling with debt. Recently City Church in Evansville, Indiana has helped pay off $1.5 million in medical debt for families at or below the poverty level. Countless churches have hosted programs educating their congregations and communities about strategies to get out of debt and attain financial independence such as those from Dave Ramsey and Crown Financial Ministries. Should the government have a role?

Voters of both parties seem to think so:

Nearly 70% of Republican primary voters and 73% of Democratic primary voters said they either support or strongly support the proposal to cap rates at 15%, according to a new INSIDER poll. Just over 60% of respondents who don’t plan to vote in the 2020 presidential primaries also said they support the bill, known as the Loan Shark Prevention Act.

It should be noted that there is a long tradition in both common and positive law of the government intervening when debt becomes unmanageable, bankruptcy. In his book For God and Profit, Sam Gregg describes the process :

Bankruptcy is the process by which an insolvent person or company is declared by law to be unable to meet his financial obligations. As a result, the bankrupt’s property is vested in the courts or some other designated legal trustee who has the responsibility to divide it among the bankrupt’s creditors. Bankruptcy law also normally prevents seizure of things that bankrupts require to earn income or to maintain their families.

Bankruptcy law seeks to reconcile two principles. The first is that, as far as possible, people receive what they are owed in light of the inability of others to pay back all that they owe. The second is that no fulfillment of promises obliges any party to the contract to accept conditions that violate human dignity.

Bankruptcy is a process designed to balance the interests of debtors and lenders when debt becomes unmanageable. There is also a long Christian tradition of prohibition on usury, the charging of excessive interest. Just what constitutes excessive interest is a difficult prudential question. The difficultly is even acknowledged in the Loan Shark Prevention Act itself:

The bill would also give the Federal Reserve flexibility to allow lenders to charge higher rates if it’s determined the federal cap “would threaten the safety and soundness of financial institutions.”

So it is a cap… except when the soundness of lenders are determined to be threatened. It attempts to do what bankruptcy does through long established procedures and precedence in a juridical context… except on the fly and determined by lenders and regulators. This seems like a recipe for crony capitalism, regulatory capture, and rent seeking.

If those risks could be avoided, and that’s a big IF, a cap on interest rates would certainly benefit consumers that carry credit card debt and large banks and firms which are better able to leverage economies of scale. Consumers who use credit cards but do not carry credit card debt would see less enticing “Rewards” programs as margins tightened and smaller banks and firms, less well positioned to reduce their margin, would reduce their lending or exit the credit market entirely.

I am generally against the use of credit and believe government has distorted incentives to increase credit usage, so I am sympathetic to some lending restrictions. At the same time I currently benefit from the system as constructed. I use a credit card which charges above the median rate on which I do not carry a balance. I get 10 cents off every gallon of gas and periodic gift certificates which I use for groceries. The card is branded as the retailer’s but is actually that of a third party bank. Is the relief some would receive at rates of 14.99% worth the trade off of a potentially less open and competitive lending market? Would large firms use their considerable resources to influence regulators to allow them to go over the cap?

These are tough questions which I am not certain Senator Sanders and Representative Ocasio-Cortez have thought through. Their proposal, however, is a welcome invitation to do so and they are right that American consumers seem to be in a perilous debt spiral. In the mean time, we can all begin taking some baby steps to achieve our own financial security and independence.

Dan Hugger

Dan Hugger is Librarian and Research Associate at the Acton Institute.