Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez announced new legislation Thursday to cap credit card interest rates at 15%, a move that they said will help protect consumers from the “greed” of the credit card and banking industries.
Sanders, who is vying for the 2020 Democratic presidential nomination, referred to credit card industry executives as “loan shark hoodlums” in three-piece suits as he outlined the legislation. He also accused the industry of “grotesque and disgusting” behavior.
“Let’s be clear what we’re talking about: We’re talking about economic brutality,” Sanders said in announcing the plan during a Facebook livestream with Ocasio-Cortez. “We are talking about some of the most powerful people in the world, people who make millions and millions of dollars a year, and banks that make billions of dollars a year in profit. And they see a real profit center in going after desperate people…who cannot afford the basic necessities of life.”
Credit-card companies collected $180 billion in revenue from interest and fees last year, according to a summary of the proposal released by Sanders’ office. Banks can borrow at 2.5% interest rates from the Federal Reserve, but the average credit-card interest rate current for consumers is a record-breaking 17.71%, the lawmakers noted.
In 1978, the Supreme Court overturned state laws protecting against usury by ruling that states could set their own interest rate laws.
The bill would allow for the Federal Reserve to allow lenders to charge higher rates, if it determines that the national usury cap would threaten the safety and soundness of financial institutions. Interest rates could only be raised above 15% for a maximum of 18 months, according to the proposal.
The 15% ceiling proposed is the same interest rate cap that Congress imposed on credit unions almost 40 years ago.
Ocasio-Cortez said tightening the interest rate rules was a moral issue. She said the industry for too long has been allowed to use people’s personal misfortunes and income status to profit through predatory lending.
“This isn’t anything radical, because we had these laws for a very long time,” Ocasio-Cortez said. “We had them in red states, we had them in blue states. We had them in half of the United States … Ever since then, it’s given credit card companies and for big banks to charge extortion level interest rates to the poor.”
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Payday loans would also be subject to these rules, which could undercut an industry that has flourished in poor and minority communities where consumers sometimes find traditional credit difficult to obtain.
The legislation is likely to face an uphill battle in Congress, at least in the near term.
Ninety percent of consumers said that they wanted a cap on credit card interest rates, according to a recent survey by CompareCards.com.
Matt Schulz, the chief industry analyst for CompareCards, there is “a less-than-zero-percent chance” of the Sanders and Ocasio-Cortez legislation happening during President Trump’s administration. But he said it could be possible to see movement on the issue if Democrats take the White House in 2020.
“There are powerful people and groups that have billions of reasons to make sure it doesn’t happen,” Schulz said. “But if the winds of political change blow through Washington, D.C., next year, I’d expect that the fight will happen, simply because so many Americans want it to.”
There would likely be push back from the credit card companies, said Ted Rossman, an industry analyst with CreditCards.com.
“It would cut into their profits,’’ he said, “and they would say they should have the right to charge more because they’re extending unsecured credit and there’s no guarantee they’ll be paid back and there are no assets on the line as collateral.’’
The average card interest rate offered to those with good credit is 17.73%, Rossman said, while those with lower scores see an average rate of 24.99%. That’s compared to an average 30-year fixed mortgage rate of 4.29%, and an average 4.78% interest rate on a car loan repaid over five years.
While a 15% interest rate cap on credit cards would be lower than what many Americans have, it can still weigh down balance-carrying borrowers with debt.
“I don’t even want you paying 15 %,’’ Rossman says. “Fifteen percent, 20%, 25% are all big numbers. If you’re paying anything like that for any length of time it’s going to be harmful to your overall financial picture so it really does pay off to cut your expenses, take on a side hustle, sell some stuff on Ebay, whatever you can do to make credit card debt a priority.”
For Sanders’ campaign, the legislation offers an opportunity to make his case to Democratic primary voters that he has been a champion of greater regulation of the financial industry.
Sanders push for the legislation comes as another presidential hopeful, Sen. Elizabeth Warren, has unveiled a series of policy proposals that she said she would pursue if she wins the White House. She has floated legislation to eliminate college loan debt for most Americans and a $100 billion program to address the opioid crisis over the next decade.
Warren says she would pay for the programs, as well as others, by raising $2.75 trillion in new revenue with a tax on America’s wealthiest households.
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In October, on the 10-year anniversary of the federal government’s $700 billion Wall Street bailout, Sanders introduced legislation that called up for breaking up some of the nation’s biggest banks, including JPMorgan Chase, Bank of America, Citigroup, Wells Fargo & Co., as well as behemoth financial institutions such as Berkshire Hathaway, Prudential Financial and MetLife.
The new legislative proposal could also give Sanders opportunity to go after 2020 Democratic frontrunner Joe Biden as the presidential race heats up.
Already the former vice president has faced criticism from Warren about his ties to the credit card industry during his time in the Senate. She’s noted Biden’s vote in the Senate backing the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, legislation that tightened rules on who could qualify for bankruptcy protection.
“At a time when the biggest financial institutions in this country were trying to put the squeeze on millions of hardworking families who were in bankruptcy because of medical problems, job losses, divorce or death in the family, there was nobody standing up for them,” Warren said while campaign in Cedar Rapids, Iowa, last month. “I got in that fight because they just didn’t have anyone. And Joe Biden was on the side of the credit card companies.”
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Ocasio-Cortez, the New York Democrat, has previously expressed her ire for the big banks. Last month, she grilled JPMorgan Chase CEO Jamie Dimon and Citigroup CEO Michael Corbat when they appeared before the House Financial Services committee.
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In pointed questioning, Ocasio-Cortez asked Dimon whether fines related to misconduct are “being incorporated into the cost of doing business. JPMorgan Chase agreed to pay a $13 billion settlement over charges that the bank misled investors prior to the 2008 financial crisis. Citigroup paid a $7 billion settlement for misdeeds associated with the sale of mortgage-backed securities tied to the 2008 financial crisis.
Ocasio-Cortez said that new proposed credit card interest rate cap is a step moving toward what a “moral America looks like.”
“All of this is possible,” Ocasio-Cortez said. “We just have to fight for it.”
Contributing: Charisse Jones