Call Sen. Hawley's bluff on credit card interest rate cap

Bloomberg News

WASHINGTON — Not everyone knows this — though I suspect most bankers do — but there is no federal limit on credit card interest rates. They're dependent on what state the issuing bank and/or customer resides in, the customer's credit score, payment history and any number of variables.

That makes sense because credit card users are not all the same. Some pay their balances in full each month; some carry a modest balance; and some are scammers using fake identities to bilk banks out of all the money they can before they disappear. In other words, some credit card debts pose a greater risk to the lender than others, and lenders are justified in pricing that risk accordingly. 

But there has been a persistent and surprisingly bipartisan effort in Congress to impose some kind of federal cap on consumer loans, including credit cards. Back in 2021, Rep. Glenn Grothman, R-Wis., joined Rep. Jesús "Chuy" Garcia, D-Ill., in introducing a bill that would cap rates on payday, car title and credit card loans at 36%; state legislatures are already doing the same thing, with Illinois and New Mexico passing 36% caps and several other states mulling similar legislation.

So it is with some surprise that we learned Monday that Sen. Josh Hawley, R-Mo., said he intends to introduce a bill in the Senate that would go still further, capping credit card interest rates at 18%. 

"Americans are being crushed under the weight of record credit card debt," Hawley told Real Clear Politics. "The government was quick to bail out the banks just this spring … but has ignored working people struggling to get ahead."

Almost all states have usury laws setting out a maximum allowable interest rate, but that rate is as variable as the word "usury" is vague and charged — Idaho, for example, has a maximum payday loan rate of 652%. Usury — derived from the Latin usas, "to use" — is an ancient term that was meant to define the charging of interest of any kind, a sin according to all Abrahamic religions because it creates the conditions whereby the prosperous can benefit from other people's misfortune. 

That definition has evolved over the course of a thousand years or so to mean charging excessive interest, which again makes sense. But what makes less and less sense over time is a system whereby there can be wildly divergent interest rates depending on the state in which one lives — or, more accurately, the state under whose jurisdiction your bank (or nonbank) legally operates. 

Still more ridiculous is the fact that there already is a federal credit card interest rate cap of 36% on the books, but it only applies to active duty military personnel. If you ask me, if Congress deems it unfair for lenders to charge high rates of interest to our soldiers and sailors, they could just as easily decide that it's unfair for those rates to be charged to anyone. So in this instance, I agree with Sen. Hawley entirely. 

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That is, of course, assuming that his legislation is being offered in earnest. Jaret Seiberg, an analyst at TD Cowen, noted that while the bill may get a hearing in the Senate Banking Committee courtesy of a like-minded lawmaker — the panel's chairman, Sen. Sherrod Brown, D-Ohio — it is unlikely to get a hearing on the chamber floor and even less likely to get a hearing in the Republican-controlled House. 

"This is about Hawley staking out a populist position to energize voters and boost his profile within the Trump wing of the Republican Party without having to worry about the ramifications of his position as the cap will not become law," Seiberg said. 

The argument against imposing such a cap tends to revolve around the fear that it would result in financial institutions pulling back still further from small-dollar lending or offering credit cards to customers with less-than-pristine credit. As former Senate Banking Chair Pat Toomey, R-Pa., argued back in 2021: "Those most in need would simply lose access to credit. If a lender can't recoup its costs, it won't make the loan."

But banks are already not making those loans, and those most in need are instead turning to products that get them embroiled in debt — a mechanism enabled by those wildly divergent usury laws. Making small-dollar lending both profitable and fair is a tricky problem, but erring on the side of profitability isn't necessarily the best solution. 

Former Supreme Court Justice Louis Brandeis once said that "states are the laboratories of democracy," meaning that state laws are allowed to differ because that's how citizens can try out new laws and see whether they work as intended, or whether they work at all. The best ideas then get adopted by Congress, and onward and upward we go. 

That of course assumes that Congress is in the business of doing that sort of thing, and if the 118th Congress has taught us anything it is that no one ever went broke assuming that Congress would not act. The prevailing wisdom is that Senate Majority Leader Chuck Schumer, D-N.Y., won't waste floor time on a bill like this that isn't going to go anywhere, but I wonder what would actually happen if he brought Hawley's bill to the floor. Would it pass? Probably not. But at least you'd call Hawley's bluff.