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Doomed or not, the proposal to cap credit card rates at 15% matters

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Let’s first stipulate that Congress is not going to enact a 15% interest rate cap anytime soon.

But here’s the more important takeaway regarding the new legislation from Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez: Its purpose is not to become law.

Instead, the point is to reframe the debate over financial services policy in Washington, shifting the range of what’s thinkable to the left, and highlighting the vulnerabilities of Democrats with voting records that are more bank-friendly.

Unlike most banking bills, the proposal from Sanders, a Vermont independent running for the Democratic presidential nomination, and Ocasio-Cortez, a New York Democrat, is simple and easily explained to the public. It’s also likely to be popular with Democratic Party voters.

The bill would cap annual percentage rates on credit cards and other consumer loans at 15%. Lenders who knowingly charge higher rates could be forced to forfeit the interest they have collected.

There’s some wiggle room to lift the ceiling temporarily if the Federal Reserve determines that prevailing interest rates would threaten the safety and soundness of lenders, and there’s a carve-out for credit unions, which are already subject to a 15% rate cap. But the policy details are not what ultimately matters.

If you’ve followed progressive politics during the Trump administration, you may have heard about the so-called “Overton window.” Named after Joseph Overton, the late think tank leader who developed the idea, it posits that only proposals that fit within a fairly narrow part of the policy spectrum on a particular issue have a chance to be enacted. Those are the ideas that mainstream politicians consider reasonable.

Over the last couple of years, progressive activists have tried to shift the Overton window to the left by embracing bold policy proposals. The thinking is that even if these ideas are unlikely to be enacted as is, they will move the terms of the debate.

One example is the notion of abolishing Immigration and Customs Enforcement as a way to change the policy debate on immigration. “Medicare for all” and the “Green New Deal” are analogous efforts in the realm of health care policy and environmental policy.

All three of those ideas — which work as slogans even though they are also legislative proposals — have prominent support from Ocasio-Cortez and Sanders.

One point that the two progressive lawmakers made implicitly last week is that an interest rate cap on consumer loans used to be considered a mainstream idea.

Ocasio-Cortez wrote on Twitter: “It’s common sense — in fact, we had these Usury laws until the 70s.”

A bill summary distributed by Sanders noted that about half of the states had usury caps prior to a 1978 Supreme Court decision that undid their effectiveness. The court’s decision in the Marquette National Bank v. First of Omaha Corp. case gave national banks the ability to export the rules of states that do not have usury caps to customers across the country.

The co-sponsors of the legislation unveiled Thursday also pointed out that the U.S. Senate voted 74-19 in 1991 in favor of capping credit card interest rates at 14%.

That largely forgotten episode demonstrates how policy ideas can move in and out of the mainstream, and is also a reminder of a time when banking policy was less partisan.

The 1991 Senate vote was held shortly after then-President George H. W. Bush suggested in a speech that banks should lower their credit card rates as a way to boost consumer spending.

In response, Sen. Alfonse D’Amato, a New York Republican, introduced legislation that would have imposed a 14% rate cap. The measure got the support of 26 Senate Republicans and 48 Democrats but was opposed by the Bush administration, which clarified that it did not favor a legal requirement on banks.

Bank lobbyists argued in 1991 that a rate cap would result in many Americans with marred credit histories being denied access to loans — an industry argument that has long been effective on Capitol Hill.

Democrats held the House majority in 1991, and they ultimately brokered a measure that — instead of capping rates on credit cards — required a government study to determine whether rates were too high.

The watered-down House legislation was reportedly crafted in large part by Sen. Charles Schumer, a New York Democrat who was then a member of the House Banking Committee.

Schumer, who has since risen to become Senate majority leader, has long courted the banking industry’s support. Sanders and Ocasio-Cortez are taking the opposite approach.

As the 2020 presidential race takes shape, keep an eye on whether other Democratic hopefuls embrace the 15% rate cap bill. Their stances will send a strong signal about whether they want to work with the banking industry or fight against it.

Bankshot is American Banker’s column for real-time analysis of today's news.

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