State Rate Caps Could Create a Compliance Headache

Credit card interest rates continue to be a hot-button issue, and four Democratic U.S. Senators recently proposed legislation that would allow states to cap interest rates on credit cards and consumer loans. 

The bill, introduced Jan. 30 by Senators Sheldon Whitehouse (D-RI), Elizabeth Warren (D-MA), Jack Reed (D-RI), and Jeff Merkley (D-OR), is meant to assist American consumers with the $1.23 trillion in credit card debt they carry.  

“Too many Rhode Islanders are stuck under a mountain of credit card debt that is driven ever-higher by compounding interest rates and fees dictated by corporations,” said Whitehouse. “Our bill will restore to states the ability to protect their own citizens from predatory rates and help get families more breathing room on their credit card bills.”

“Americans are struggling under mountains of credit card debt with astronomically high interest rates of 25, 30, even 35%,” Warren said.

“Congress must act to bring down those interest rates at a federal level — but it’s also critical that states have the ability to deliver relief. Anyone who supports lowering costs for Americans should support this bill to allow states to do their jobs.”

Proponents see the bill as a means toward financial stability for consumers.

“Costs are rising, and stubbornly high credit card interest rates have trapped too many Americans with devastating amounts of debt. We need to empower states to protect their residents from these abuses and help them chart a realistic course for financial security,” said Reed. 

“This legislation paves the way for states to step up and protect people from sky-high credit card interest rates,” said Tom Feltner, Associate Director of Consumer Policy at Americans for Financial Reform. 

“States have a critical consumer financial protection role to play that has only become more vital since the administration has attempted to shutter the Consumer Financial Protection Bureau, halt its efforts to bring down costs, and roll back its work to enforce critical financial protections.”

But opponents say compliance would be more difficult with state rate caps.

“Creating a patchwork of state-by-state interest rate caps is not the right solution” said Scott Simpson, President and Chief Executive Officer of America’s Credit Unions. 

“This approach would create a fragmented lending system, increase compliance complexity, and ultimately reduce the availability of responsible lower-cost credit offered by not-for-profit credit unions,” he said. 

And here is another way a state rate cap may have a negative effect on the credit card market. Banks and other credit card issuers may move to tighten credit limits or stop issuing cards in states that pass rate caps on credit cards.

President Trump began advocating for a 10% rate cap on all credit cards for a year in January and said he wanted the cap to take effect on Jan. 20. That did not happen. However, Citibank and Bank of America are considering offering new credit cards with 10% interest rates to consumers. 

Banks are strongly opposed to a 10% rate cap on credit cards for a year because they say it would hurt the economy and greatly restrict access to credit. But that hasn’t stopped Congress from proposing new legislation targeting credit card rates.

For instance, Senator Bernie Sanders (I-VT) has proposed legislation that would cap interest rates on all credit cards at 10% for at least five years.

A new Senate bill from four Democratic Senators would allow individual states to cap the interest rates on credit cards and consumer loans in their states. Opponents say the bill would cause compliance complexities, create a fragmented lending system, and lower the availability of low-cost credit.