Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez want to cap consumer interest ratesin an effort to curb “sky high” credit card charges and other forms of predatory lending.
While that sounds nice in principle, in practice their plan would hurt some of the people it’s intended to help by killing off an industry that’s vital to struggling households: short-term, small-dollar lending.
The history of small-dollar loans and their regulation – which I explore in a recently published book – shows why Sanders and Ocasio-Cortez should rethink their proposal or risk emboldening the type of lending they hope to stamp out. In part this is because their plan relies on an oversimplified history of the rules that limit usury, or how much interest lenders can charge.
Laws against usury are an ancient idea. Religious texts such as the Bible and Quran prohibited all forms of usury, while the Romans barred charging compound interest.
And when the early American colonists began settling up and down the Eastern Seaboard, they brought with them England’s usury law. By the 1970s all but three states still had general usury laws on the book. Annual rate caps ranged from as little as 4% in North Dakota to as high as 30% in Rhode Island.
These caps became less effective in 1978 when the U.S. Supreme Court ruled that state laws don’t apply to loans from out-of-state banks. This allowed credit card-issuing banks to avoid more stringent usury laws by locating in states with higher caps or none at all. Some states, such as South Dakota and Delaware, repealed their laws after the ruling to attract banks.
So while usury laws still generally restricted rates on some types of loans, the sky became the limit for bank-issued credit cards, with some charging subprime rates as high as 79.9% per year.
Sanders and Ocasio-Cortez would like to return to the world as it existed before what they call that “disastrous” Supreme Court ruling. Their Loan Shark Prevention Act would impose a 15% annual interest rate cap on all consumer loans while allowing states to set even lower rates.
But their understanding of history isn’t quite right. That’s because starting in the early 20th century, states began making exceptions to their usury laws to allow for small loans.
In the early 20th century, state usury laws applied to almost all types of loans. As a result, small-dollar lending was effectively outlawed nearly everywhere because lenders could not operate profitably at the legal rates of charge.
Usury laws fixed maximum charges as a percentage of the amount borrowed on an annual basis, which yielded a tiny dollar fee for small, short-term loans. For example, in a state with a 6% cap, a lender offering a US$200 three-month loan would be able to charge only $3 in total interest – the monthly rate would be just 0.5%. At such low rates, small-sum lenders could not cover the costs of running their business.
But working-class households still needed access to credit so strict usury laws didn’t diminish the demand for these loans. Rate caps simply discouraged legitimate enterprises from entering the marketplace. That left borrowers to deal with loan sharks willing to break the law.
The philanthropic Russell Sage Foundation, which studied the problem in the 1910s, urged states to exempt licensed small-sum lenders from their general usury laws. The foundation drafted a model law, which became known as the Uniform Small Loan Law, that allowed these lenders to charge up to 3% per month, or 36% on an annualized basis, on cash loans of a few hundred dollars.
Today, all 50 states continue to allow small-sum lenders to charge more than 15% per year.
by Peter Roff • Townhall
Despite what many people think the left-liberal coalition’s decision to base so much of its effort on keeping the government out of our bedrooms is, long term, a losing strategy. Conservatives have a slight advantage where these issues are the only ones considered by people when deciding how to vote. If they could redirect their efforts to keeping government out of the kitchen they might have something.
Uncle Sam has decided what we eat and drink is somehow his business. The government says it wants to bend the healthcare cost curve downward but really this is just another version of the ”we know what is best for you” argument that has so many people up in arms. Continue reading
Affordable Care Act opponents must make their goal the enactment of a better plan.
by James C. Capretta • National Review
In the 2014 midterm elections, opposition to the Affordable Care Act — i.e., Obamacare — was a clear political winner. That’s obvious from the election results themselves but also from polling that consistently finds that far more of the electorate disapproves of the law than approves of it.
It is therefore to be expected that the incoming Congress, fully under the control of the GOP, will vote on a straight repeal bill, probably very early in next session. In the House, such a bill will pass easily. But in the Senate, Democrats will control at least 46 seats in the new Congress, giving them plenty of votes to filibuster most legislation they oppose. Consequently, the most likely scenario is that the repeal legislation will die in the Senate and therefore never get sent to the president for a certain veto. Continue reading
by Horace Cooper
Much has been written about the over-reach of Dodd-Frank and the drag that law and its progeny will have on the financial services sector, the economic recovery, and job creation. Evidence continues to mount that the specter of over-regulation is crowding out free market solutions and restricting credit in the markets. Worse, the negative effects of government interference in the financial services industry extend well beyond large commercial banks deemed “too big to fail.” A case in point is credit unions.
Credit unions serve an important source of credit for consumers and small businesses. Historically this has been especially true during economic downturns, when the banking industry either tightened or in other ways limited credit. Continue reading