Senator Bernie Sanders recently announced that he will be introducing a bill, the “Loan Shark Prevention Act,” that would amend the Truth in Lending Act (15 U.S.C. 1606) (TILA) to establish a “national consumer credit usury rate” that would limit the 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” (Sanders Bill). Representative Alexandria Ocasio-Cortez reportedly will also be introducing the Sanders Bill in the House.
The Sanders Bill would also provide that fees that 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.” Insured credit unions would not be subject to the rate cap. There is one limited circumstance under which the 15% APR prong may be higher. The Federal Reserve Board “may establish, after consultation with the appropriate committees of Congress, the Secretary of the Treasury, and any other interested Federal financial institutional regulatory agency, an annual percentage rate of interest ceiling exceeding [a 15% APR] for periods of not to exceed 18 months upon a determination that :
- Money market interest rates have risen over the preceding 6-month period; and
- Prevailing interest rate levels threaten the safety and soundness of individual lenders, as evidenced by adverse trends in liquidity, capital, earnings, and growth.”
The Sanders Bill would implicitly repeal well-established doctrines under Section 85 of the National Bank Act (enacted in 1864) and its analogue provisions (enacted in 1980) that provide usury authority for other FDIC-insured banks and thrifts. These usury statutes have authorized banks to charge whatever interest rate is authorized under state law to any other lender located in the bank’s home state. This authority, which is referred to as the “Most Favored Lender” doctrine, has also been interpreted by the U.S. Supreme Court in Marquette National Bank v. First of Omaha Corp., 439 U.S. 299 (1978), and its progeny to authorize banks to “export” throughout the country the interest rate permitted by the law of the state where the bank is located. This additional authority is referred to as the “Exportation” doctrine.
The Sanders’ Bill would implicitly repeal both doctrines which are the linchpin of the country’s robust bank interstate lending programs and have enabled more people to obtain credit than would otherwise be the case. It would roll back the usury laws to those that existed more than 40 years ago when banks were not engaging in much interstate lending because of such restrictive usury laws. In place of current law, the bill would substitute for the uniform interest rates that are now used interstate lending programs a patchwork quilt of usury laws and interest rate limits that would vary by state. That change would not only reduce the revenues from such lending programs but also increase the costs, inevitably causing banks to tighten their credit card underwriting standards.
The Sanders Bill is also unclear with respect to the meaning of the term “maximum rate permitted by the laws of the state in which the consumer resides.” That might reasonably be construed to mean the general usury law of the borrower’s home state. For borrowers whose home state is Pennsylvania, for example, that general usury rate would be only 6% per annum simple interest even though Pennsylvania law permits banks, credit unions, and consumer finance companies to charge more than 6% to Pennsylvania borrowers on certain types of loans. If the term is construed to mean the general usury law, practically all lenders, other than credit unions, would be unable to engage profitably in consumer lending and would need to shut down their consumer lending operations.
It seems very unlikely that the Sanders Bill will gain traction in this session of Congress since Republicans control the Senate. The Sanders Bill seems intended to be a political “talking point” more than a real effort to enact a national consumer usury ceiling. We can only hope so.