New York Congresswoman Alexandria Ocasio-Cortez on Thursday introduced her first official bill to Congress: the Loan Shark Prevention Act, which would limit the interest rate on all consumer loans to $ 15. %. (In the Senate, Vermont Senator and Democratic hopeful for 2020, Bernie Sanders, unveiled an identical proposal.) Enacting the measure would have two main effects: First, it would force most credit card companies to lower rates. that their customers are currently paying. Second, and most importantly, it would wipe the payday lending industry off the map.
Cards are the most popular form of consumer credit and typically carry an annual percentage rate of around 20 percent, depending on the creditworthiness of the borrower. Payday loans are much more expensive, and if you don’t know them personally, consider yourself lucky. The term refers to lenders who issue unsecured loans of a few hundred dollars at a time, and takes its name from the source of funds most borrowers use to pay off their debt: their next paycheck.
Even for such modest extensions of short-term credit, consumers pay high prices. The Center for Responsible Lending has created a horrible card typical payday loan rates: 391% in Washington, 460% in California, 521% in Mississippi. In Texas, where the rate is unreasonable at 661%, taking an advance of $ 500 would force the borrower to pay almost $ 800 a month later. “It’s a debt trap for workers,” Ocasio-Cortez noted Thursday. “This has to end.” Presumably a bill that prevents these outfits from charging more than 15 percent would encourage them to simply go out of business.
Because this credit is so expensive, users unable to repay it on time can quickly get stuck in a devastating cycle of compound debt. A 2014 Consumer Financial Protection Bureau study find that more than 80% of payday borrowers carry over their balance for a new term or take out another loan within 14 days. Over an 11-month period, more than 20% of borrowers who receive monthly paychecks took out at least one loan per month to make ends meet, and more than half of them receive federal Social Security benefits , disability or retirement.
Under the Trump administration, the Bureau largely abandoned its watchdog responsibilities and made it easier for payday lenders to take advantage of borrowers. Earlier this year he announcement a rollback of Obama-era regulations that require creditors to assess a borrower’s ability to repay debt before taking out a loan. (The Bureau justified this decision on the basis that it will “increase consumers ‘access to credit”; in effect, it will increase payday lenders’ access to vulnerable consumers.) The existence of the industry is a reminder that in this country it is extremely expensive to be poor.
Payday lenders justify their business model by claiming that they are the only ones that extend credit to borrowers who otherwise could not get it. Often, however, they simply extend credit to borrowers who have no other choice. These creditors tend to cluster in low-income neighborhoods and rural areas where banks – whose lending behavior is subject to much stricter state and federal regulations – are reluctant to open branches and offer financial services at reasonable prices.
This form of soft discrimination has a devastating impact on communities of color, exacerbating inequalities and widening the racial wealth gap. A 2018 to study found that check-cashing locations in Michigan were most likely to appear in census tracts with higher African American and Latin American populations. A 2005 investigation determined that black neighborhoods in North Carolina had three times as many payday loan stores as white neighborhoods.
As the Green New Deal resolution Ocasio-Cortez has defended in the House, which skillfully integrates Medicare for All and a guaranteed employment into a comprehensive plan to save the planet from heat-induced death, the Loan Shark Prevention Act is a common sense proposition that makes simultaneously advancing a strong social justice agenda. . While many politicians tiptoe these issues, viewing their choices as blind to things like race and socioeconomic status, Ocasio-Cortez and Sanders consider the legislation and its impact on people, especially people. Americans most vulnerable, as inseparable from each other. By crafting a solution that makes all consumer credit more affordable, they are making an end to these abuses a cause everyone can support.