The proposed law will amend the Truth in Lending Act (TILA) to establish a “national consumer credit usury rate”, which would limit the Annual Percentage Rate (APR) “applicable to any extension of credit” to the lesser of “15 percent on unpaid balances, inclusive of all finance charges or the maximum rate permitted by the laws of the State in which the consumer resides.”
The bill is raising a lot of eyebrows among banks, payday lenders, and private lenders who specialize in offering riskier, short-term loans that come with a higher interest rate.
In an editorial for CNN published on May 17, 2019, Senator Sanders expressed his disgust at the fact that banks can borrow money from the Federal Reserve at a 2.5% interest rate, but consumers are paying a median credit card rate of 21%. He further lamented that department store credit cards come with an even higher interest rate, averaging around 27%.
Sanders’ proposed bill also explicitly limits fees allowed for consumer loans, and provides that even fees which are not considered finance charges under TILA “may not be used to evade the rate cap and the total sum of such fees may not exceed the total amount of finance charges assessed.”
It is important to note that Sanders’ bill runs counter to long-established principals of the National Bank Act of 1864 and its provisions (enacted in 1980) which allow banks to charge any interest rate authorized under state law to other lenders located in the bank’s home state.
This authority, known as the “Most Favored Lender” doctrine, essentially provides banks with authorization to “export” across the nation the interest rate permitted by the state in which the bank is located. This national effect of the “Most Favored Lender” doctrine is commonly referred to as the “Exportation” doctrine.
The Loan Shark Prevention Act would repeal both the “Most Favored Lender” doctrine and the “Exportation” doctrine, both of which serve as the foundation for our country’s robust interstate banking network and empower more consumers across the country to apply for and obtain credit.
Implementation of Senator Sanders’ bill would arguably roll the United States back nearly four decades to a time when usury laws restricted banks from engaging in most interstate lending and many consumers were wholly shut out from obtaining non-recourse loans.
In place of the current law, Sanders’ new bill would substitute uniform interstate lending rates used by banks with a patchwork of state laws that would vary by state and potentially inject uncertainty into the marketplace. The change would not only reduce revenues from interstate bank lending, but would also increase costs. These costs would cause banks to rethink lending to consumers with shaky credit ratings and ultimately result in fewer borrowing options for America’s struggling families.
Also unclear in the bill is the language that states, “maximum rate permitted by the laws of the state in which the consumer resides.” Most would understand that clause to mean the general usury law of the consumer’s home state. For example, Pennsylvania has a prevailing usury rate of 6% per annum simple interest, although Pennsylvania law permits banks, credit unions, and consumer finance companies to charge more than 6 percent for certain types of loans. But, if the phrase, “maximum rate permitted by the laws of the state in which the consumer resides” means specifically that no bank can charge more than the general usury APR for that state, lending will be restricted due to an increased unprofitability factor, and the number of credit options available to consumers will necessarily be reduced.
Given that the bill was introduced by Senator Bernie Sanders, a self-described Socialist Democrat, and Alexandria Ocasio-Cortez, a freshman Congresswomen from New York, it is highly improbable that it will gain traction in a Republican-controlled Senate. Most pundits are chalking the proposal up to political posturing ahead of the presidential primary next year.
Still, it is worth noting that politicians continue to propose bills to restrict lending through onerous regulations which, although allegedly proposed to protect the public welfare, would actually hurt lenders by limiting their ability to loan to consumers, enforcing more restrictive lending terms, and providing less short-term emergency financing opportunities.
If you are a non-conventional lender and you have questions about permitted interest rates for your loan, contact the Geraci Law Firm today.
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