Seven out of 10 GOP primary voters are sympathetic to the main ideas of the Loan Shark Prevention Act introduced last week by Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez, according to a Business Insider poll. The legislative proposal would cap the interest rates that credit card companies and payday lenders can charge consumers at 15 percent.
The surprising show of support from GOP voters for the goals of the bill suggests that the base of support for efforts to rein in loan sharks crosses party lines in ways that leaders of the Republican Party may be reluctant to admit. In addition to the unexpected support from GOP voters, 73 percent of Democratic primary voters polled by Business Insider said they support the proposal.
In addition to capping the interest rates that credit card companies charge, the bill would also allow the postal service to carry out certain financial functions, such as check-cashing and letting customers pay bills directly via the postal service, as a way to cut out profiteering middle-men institutions like payday lenders.
Critics were quick to argue that this would both create a credit squeeze as private companies move away from providing loans to riskier customers, and that it would also force cash-strapped credit card companies to do away with such perks as consumer loyalty rewards. But, I’d suggest, the precise limit — whether too low or too high, or simply too rigid to meet changing market conditions — is in some ways far less important than the broader principle: the idea that financial institutions are largely out of control and need to be somewhat tamed.
Earlier this year, Ocasio-Cortez launched broadsides against the companies that determine consumers’ credit scores. Now, in proposing interest rate caps, progressive members of Congress are firmly siding with those who believe the financial industry needs to be regulated; that, left to its own devices, it cannot help but bend toward exploitation and usury. And, if the polling numbers are accurate, in going after exploitative lenders, progressives have a grand opportunity to mine a vein of public discontent on the issue.
This isn’t a new battle. It’s been going on in the U.S. since the Progressive era. Interest caps were in place for much of the 20th century, but after a few decades of deregulation, they were proposed again in the early 1990s, though, ultimately, the needed legislation didn’t pass.
The idea started to gain traction once more during the Obama years when Sen. Elizabeth Warren championed the creation of a Consumer Financial Protection Bureau (CFPB), an agency with a specific mandate to protect consumers from the predations of the powerful, in some cases too-big-to-fail organizations.
From the get-go, conservatives detested the CFPB, arguing that it was a classic case of government overreach and would come to squeeze access to credit rather than to improve it. They disliked its emphasis on consumer protections, and really disliked regulatory proposals for industries such as payday lending, the most usurious of all the lending systems in the U.S.
Credit cards charge an annual rate of interest, payable each month. Payday lenders, by contrast, craft ultra-short-term loans that are designed in such a way as to be pretty much unpayable. One can borrow for two weeks to a month, with an abundance of “fees” attached to the loan. If and when you can’t pay it off after those few weeks, an entirely new set of fees kicks in, and the process begins all over again. Even though the lenders do not call these fees “interest,” in practice, they serve much the same effect, hugely increasing the cost of the loan over the course of only a few months. It’s not uncommon to find these fees working out to be the equivalent of many hundreds of percent — in some cases, more than 1,000 percent in interest per year.
Only those with no credit or lousy credit go to payday lenders, which are the bottom feeders of the financial industry, trawling for the most desperate and easily exploitable borrowers. Who else but a bottom feeder would lend a poor person a few hundred dollars, knowing that the fees would convert those few hundred dollars into many thousands of dollars of debt over the coming months? In 2016, Pew Research estimated that 12 million Americans take out payday loans in any given year, racking up over $9 billion in “fees.” That number is still quoted by industry experts as the best guess for how many are taking out loans three years on.
During the tail end of the Obama presidency, the CFPB took baby steps to start to rein in the payday lending industry, and several states piggybacked off of this to make it tougher for predatory lenders to operate in their jurisdiction. In 2004, 44 states allowed payday lending; by 2016, that number had gone down to 36. Then, Trump got elected, appointed Mick Mulvaney to head the agency, and essentially gave him a mandate to take the wrecking ball to it from the inside.
Today, the payday lending industry is booming, perhaps as it never has before. Thirty-two states allow virtually unregulated high-interest rate lending, and the CFPB, under the Trump administration, has largely abandoned the field. Federal government oversight efforts are dormant.
The impacts of this cannot be overstated: houses foreclosed on, cars repossessed, tax refunds seized — a slide, for many, into catastrophic debt. Oftentimes, borrowers pay off one loan by taking on another, making the slide into debt even harder to pull out of. According to the Center for Responsible Lending, the average user of payday loans takes out 10 such loans in any given year.
Where the feds are stepping back, however, a growing number of states, pushed by grassroots anger, are starting to step forward. The Center for Responsible Lending estimates that 15 states, including strongly Republican-leaning ones and the District of Columbia, have capped payday loans at 36 percent interest — still far higher than what Sanders and Ocasio-Cortez are talking about, but orders of magnitude lower than what’s currently a reality in many states. Momentum is growing around the country for more interventions.
Five states have now passed referenda limiting payday loans: South Dakota, Ohio, Arizona, Montana, and this past November, Colorado. There, voters overwhelmingly passed a measure capping interest rates at 36 percent on payday loans. Earlier this spring, Nevada legislators, urged on by the Progressive Leadership Alliance of Nevada, became the latest group to head into battle over the issue. As with the reform in Colorado, they are calling for a 36 percent interest rate cap on these loans. Meanwhile, on the other side of the country, the Maine Center for Economic Policy is pushing a “stop the debt trap” movement against predatory payday lending, pushing for the CFPB to maintain requirements that payday lenders determine whether a borrower can afford to repay the loan before lending them money; and limiting the number of open payday loans that a customer can have. Like so many economic justice campaigns, Stop the Debt Trap is partly about defending existing regulations from the Trump administration’s efforts to roll them back, and partly about defining a new set of regulations to tackle growing economic inequity.
Now, with the House under Democratic control, and with Democrats moving to the left on these issues, the Financial Services Committee, under Chairwoman Maxine Waters, has a chance to frame the debate on regulations. Representative Waters is pushing a Consumers First Act that would reverse the Trump administration’s stampede away from regulations and consumer protections. The act, which has the support of co-sponsoring lawmakers representing 19 states, would restore to the CFPB many of the regulatory powers eviscerated since January 2017. It would also add transparency to consumer complaint databases; would restore the power of the Consumer Advisory Board, which brings together nongovernmental experts on consumer protections and financial services, members of the community, advocates, and also industry representatives to discuss emerging practices and products in the consumer finance industry. And it would make it harder for the administration to suppress reports on consumer debt. Waters’s measure is backed by more than 50 consumer-rights and labor organizations.
It’s unlikely that the GOP-controlled Senate will pass (or that Trump will sign) any significant regulatory measures on the credit industry, despite the support that GOP voters are showing for Sanders’s and Ocasio-Cortez’s proposals. After all, Trump misses no opportunity to mock Waters, conservative media deride both Ocasio-Cortez and Sanders as “socialist,” and the financial industry will continue to lobby furiously against any such reforms. But these proposals all serve to frame the issue. And, progressives have been quick to note the bipartisan public support for change.
At the moment, the most predatory of lenders understand that the Trump administration has their back. But as an array of consumer protection measures start being voted on in the House, and as more states begin passing caps on payday lending and pushing other regulatory measures, a new politics is taking shape around consumer rights. As with so much else, Trump’s regressive politics on consumer protections are spawning a furious backlash. Out of the ashes, a new regulatory structure will, over the coming years, surely arise.