With the Republican Party in control of the Senate and the White House, it is highly unlikely that financial regulations proposed by any Democrat will become law during the current administration. Nonetheless, it is worth paying attention to the types of prescriptions that Democrats, including some presidential candidates, have for the consumer financial system. Two recent proposals may portend a more stringent future regulatory environment for the credit card and FinTech industries.
The 2018 Policy Mood survey, an annual review conducted since 1950 that aggregates opinion data derived from a variety of major academic and commercial polls, determined that Americans have more liberal policy views than at any time in the history of the survey.1 Such opinions encompass a wide range of economic policy ideas, but notably include continued distrust of large financial institutions since the 2008 financial crisis,2 growing anxiety over skyrocketing personal debt,3 and resentment toward increasing interest rates on credit products ranging from payday loans to credit cards.
According to creditcards.com, the average APR on all credit cards as of June 2019 was 17.73% - higher than at any point since at least 2007, when tracking of this statistic began. The median APR is 21.44% and the average maximum APR on credit cards is now over 25% – not including penalty rates.4 Increasing APRs have coincided with an uptick in American credit card debt – now at $1.04 trillion, as compared to $854 billion five years ago.5 Meanwhile, the average interest rate on a typical payday product, often the only viable financing alternative for Americans mired in credit card debt or without access to the banking system, is now almost 400%, according to the CFPB.6
Credit cards and payday loans, as well as personal lending by FinTechs, have been targeted for increased regulation by several prominent Democratic politicians. For example, Senator Bernie Sanders (I-VT), currently one of the leading Democratic candidates for President in 2020, has introduced legislation in the Senate to cap credit card interest rates at 15%. Popular freshman Representative Alexandria Ocasio-Cortez (D-NY) has introduced a House version of the bill.
Credit card interest rate caps are not a novel concept – Congress also imposed a 15% cap on credit unions in 1980 – however, the credit card industry has not faced such a cap in recent times, and the industry has already begun pushing back on the idea that such a policy would benefit consumers. The Consumer Bankers Association noted that “[o]ne-size-fits-all caps would make all loans . . . harder for Americans with lower credit scores or non-traditional sources of income to receive.”7 The interest rate cap would also restrict the ability of payday lenders to continue offering their products; and while often considered predatory, such products represent one of the only ways for unbanked or underbanked Americans to gain access to credit.
Another bill, introduced in the Senate by Senators Merkley (D-OR), Reed (D-RI), Warren (D-MA), and Whitehouse (D-RI), would also impact allowable interest rates in the consumer finance industry. The Empowering States’ Rights to Protect Consumers Act would amend the Truth in Lending Act to restore power to the states in capping interest rates for usury purposes. This power was effectively circumscribed by the U.S. Supreme Court’s decision in Marquette Nat. Bank v. First of Omaha Svc. Corp., 439 U.S. 299 (1978), which allowed national banks to charge up to the interest rate allowable in the state in which they are licensed. The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) granted effectively the same powers to state-chartered banks in 1980, and the status quo has been maintained since then.
This status quo has enabled the credit card and FinTech industries to charge up to the interest rate cap allowable in the state where they are licensed. The Merkley, Reed, Warren, and Whitehouse bill would require revisiting these strategies and would create a logistical and regulatory challenge for a consumer finance industry that has come to rely on the longstanding principles set out by Marquette and DIDMCA nearly 40 years ago. States too, which have used these principles to guide supervisory strategies and draw financial institutions to their jurisdictions, would have to rethink their regulatory schemes.
Though these pieces of legislation are not likely to become law during the current session of Congress, they are worth tracking as emblematic of current Democratic thinking about consumer financial regulation. This is especially true when taking into consideration that both of these bills are sponsored by current Democratic frontrunners for the party’s nomination, and that public sentiment on issues related to consumer finance continues to shift in favor of these types of proposals. It is conceivable that these bills could be reintroduced under a Democratic administration, and as such, DWT will continue to monitor this area for any further developments.