The law against usury should be restored to protect consumers, keep
more of working Americans’ money out of the financial sector and
restrict the kind of subprime lending that contributed to the
financial crisis. We need a national cap on interest rates to keep
debt from expanding beyond what our economy can actually handle.
Current law allows credit card companies to skirt state usury laws
designed to protect their residents by officially incorporating
themselves in states like South Dakota and Delaware that have no usury
restrictions at all. The state-based system has been essentially moot
since 1978, when the Supreme Court ruled in Marquette Nat. Bank of
Minneapolis v. First Omaha Service Corp. that state anti-usury laws
cannot be enforced against nationally chartered banks “located” in
other states.
Since the majority of credit transactions are handled between states,
a new federal law must be enacted that supersedes the state system
with a nation-wide interest rate cap. Senator Bernie Sanders, for
example, has proposed an interest rate cap of 15 on credit cards,
except when it is determined that prevailing interest rate levels
threaten the safety and soundness of individual lenders
Other types of consumer loans, like payday loans and pawnshop loans,
must also be addressed. A recent study by the Center for Responsible
Lending found that a typical payday loan consumer takes out nine loans
per year, meaning that current “reforms” being promoted by Democrats
in Congress would amount to annual interest rates of nearly 400
percent. Indeed having borrowers stuck in a cycle of successive loans
is crucial to payday lenders’ business models. The same CRL study
found that 90 percent of payday lending business is generated by
trapped borrowers with five or more loans.
An annual interest rate, somewhat higher than the credit card cap,
should be applied to other types of consumer loans. If their business
model does not function under a generous interest cap of, say, 30
percent, they should not be in business.
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