National cap needed on loan and credit-card rates

Since the beginning of the year, millions of credit-card customers have been hit with higher interest rates — in many cases from lenders that have received billions of dollars in bailout cash from taxpayers.

U.S. Sen. Bernie Sanders, a Vermont independent, has responded with legislation that would impose a 15 percent cap on rates for all consumer loans, including plastic.

And you know what? It just might work.

That's because Sanders' bill would trump a 1978 Supreme Court ruling that allowed banks to set credit-card rates at whatever their home state allowed. Banks, in turn, high-tailed it to places like South Dakota and Delaware, which abandoned their usury laws to entice financial institutions into setting up shop.

"Every state would have to honor a federal rate cap of 15 percent," said Sanders. "It would be a national usury law."

He called after reading about how Capital One Financial is raising many cardholders' rates to nearly 18 percent — even for people who pay their bills on time and haven't missed any payments.

Meanwhile, Citigroup has told cardholders their rates could soar to almost 30 percent if a single payment is missed, and J.P. Morgan Chase said it would start charging a $10 monthly fee to people who have carried large balances for more than a couple of years.

Bank of America. Wells Fargo and American Express are among other major lenders that have notified customers recently of rate increases.

"Everyone has been focusing on the subprime-mortgage mess," Sanders said. "I think it's time to focus on these absurd interest rates as well."

Credit-card defaults are rising and could hit a record 10 percent this year. One reason is that so many people got much deeper into debt than they should have.

Another is card issuers keep turning the screws on existing customers — those with balances they can't just walk away from — in hopes of raising cash to cover the industry's bad bets in the housing market.

Sanders noted that federally chartered credit unions were limited for years to charging no more than 15 percent on loans. The National Credit Union Administration raised that cap to 18 percent in 1987.

"If a rate cap has worked for credit unions all these years, it could work for our friends in the financial industry as well," Sanders said.

Chris Collver, legislative and regulatory analyst for the California Credit Union League, agreed that a rate cap hasn't hurt business for the nearly 400 credit unions represented by his organization.

"It hasn't been an issue," he said. "Credit unions are still able to thrive."

I pointed out to Sanders, who spent more than a decade on the House Financial Services Committee before joining the Senate in 2006, that the banking industry would throw every lobbyist at its disposal toward fighting his bill.

"Obviously this is a pretty radical act, and it will be fought," he replied. "But I think the American people are disgusted with the financial industry. They want change."

You could claim that an interest rate of 15 percent or 18 percent is more than enough to accommodate any amount of risk on the lender's part. If a loan appears riskier than that, don't make it.

"What we have to ask as a nation is whether it's ethical to charge people 30 percent interest rates," Sanders said. "This is loan sharking. Let's call it what it is."