Yesterday, Senator Bernie Sanders and Rep Alexandria Ocasio-Cortez jointly introduced The Loan Shark Prevention Act, which will cap credit card interest rates at 15% (and closes the loopholes that lets credit card issuers exceed their stated APRs with the use of hidden fees) and which re-establishes American post-office banking.
Critics of the bill say that it will put the payday lending industry out of business and that this will harm poor people, who struggle to get credit elsewhere. It’s a position that has been carefully cultivated by the wildly profitable predatory lending industry, who spent lavishly on academic research to support the position, then used bots to flood regulatory proceedings that might have produced evidence to counter it. This has allowed for a modern return of usury, targeting the poorest and most desperate Americans, with out-and-out swindles going unpunished (naturally, Trump has dismantled any protections victims of the debt industry might have sought).
But capping interest rates at 15% won’t just benefit the desperate and poor. Today, banks charge an average of 17% on their loans, but — thanks to generous federal monetary policies and low fed interest rates — they only pay 2.5% to access capital. That massive spread means that banks are guaranteed massive profits — at taxpayer expense, and with taxpayers pickup up the pieces when the banks’ usury destroys Americans’ lives.
America does have a problem with underserved and underbanked poor households, and this has indeed created a thriving alternative finance industry to serve these peopel. Underserved households with annual incomes of $25,000 are spending an average of 9.5% of their annual income ($2,412)/year on finance costs — a sum equal to the average family’s grocery bill.
But the reason these people can’t get traditional loans is that they’re bad credit risks, and the reason they’re bad credit risks is that they’re grossly underpaid and literally can’t survive on the money they earn, so they have to borrom just to keep from being evicted or starving. There’s no reason that people working full time jobs should be in debt traps: after all, corporate profits are commanding an all-time high proportion of US GDP, meaning that companies have lots of excess profits they could be transfering to their workers through higher wages. If your business is profitable because its workforce is desperate enough to accept sub-starvation wages, then your business isn’t profitable, it’s an indirect welfare recipient, receiving a public subsidy in the form of housing and food benefits, and socialized bankruptcy costs that are inflicted on the whole of society.
Meanwhile, the Sanders/Ocasio-Cortez bill has an alternative to both traditional and subprime finance for poor people (and everyone else): post office banking, a feature in most advanced nations, and once a mainstay of American finance. Post office banks leverage the convenient locations and long hours of post offices across the country, offering services to the unbanked, and meanwhile shoring up the public mail service against the monopolists who are trying to abolish public postal services, like Fedex, UPS, and Amazon.
One of the stunning parts in reading the document is to see how wildly successful this program could be, precisely because traditional banks are withdrawing from many of the neighborhoods in which moderate and lower-income people live, and non-banks offer targeted, richly priced services, too often designed to take advantage of desperation or simple lack of alternatives. Even though most of us are aware of this general picture, the USPS IG, dimensions the scale of this problem and the costs to the affected householdsThere are 34 million un and underbanked American households, which translates into 28% of the population. And consider what this second-class status translated into in fees and other charges:
The average underserved household has an annual income of about $25,500 and spends about $2,412 of that just on alternative financial services fees and interest. That amounts to 9.5 percent of their income. To put that into perspective, that is about the same portion of income that the average American household spends on food in one year.5 In 2012 alone, the underserved paid some $89 billion in fees and interest.
Why You Should Back the Sanders/AOC Plan to Cap Credit Card Interest Rates at 15%, Re-Launch the Postal Savings Bank [Yves Smith/Naked Capitalism]