Sanders's and Ocasio-Cortez's Banking Bill Shows How Racial Justice Is Good Policy
On Thursday, New York congresswoman Alexandria Ocasio-Cortez introduced her first official bill in the United State Congress: the Loan Shark Prevention Act, which would limit the interest rate on all consumer loans to 15 percent. (Over in the Senate, Vermont senator and Democratic 2020 hopeful Bernie Sanders unveiled an identical proposal.) Enacting the measure into law would have two primary effects: First, it would force most credit card companies to lower the rates their customers currently pay. Second, and most importantly, it would wipe the payday lending industry off the map.
Cards are the most ubiquitous form of consumer credit, and typically carry an annual percentage rate of around 20 percent, depending on the borrower's creditworthiness. Payday loans are far more expensive, and if you're not personally familiar with them, 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 which most borrowers use to repay their debt: their next paycheck.
Even for such modest extensions of short-term credit, consumers pay steep prices. The Center for Responsible Lending has created a legitimately horrifying map of rates on a typical payday loan: 391 percent in Washington, 460 percent in California, 521 percent in Mississippi. In Texas, where the rate is an unconscionable 661 percent, taking out a $500 cash advance would require the borrower to pay nearly $800 a month later. "It's a debt trap for working people," Ocasio-Cortez said on Thursday. "It has to end." Presumably, a bill that prevents these outfits from charging more than 15 percent would prompt them to simply close down shop.
Because this credit is so expensive, users unable to repay it on time can quickly find themselves stuck in a devastating cycle of compounding debt. A 2014 Consumer Financial Protection Bureau study found that more than 80 percent of payday borrowers roll over their balance to a new term or take out another loan within 14 days. Over an 11-month period, more than 20 percent of borrowers who receive monthly paychecks took out at least one loan per month in order to make ends meet, and more than half of them receive federal social security, disability, or retirement benefits.
Under the Trump administration, the Bureau has largely abandoned its watchdog responsibilities and made it even easier for payday lenders to take advantage of borrowers. Earlier this year, it announced a rollback of Obama-era regulations that require creditors to evaluate a borrower's ability to repay a debt before originating a loan. (The Bureau justified this decision on the grounds that it will "increase consumer access to credit"; really, it will increase payday lenders' access to vulnerable consumers.) The industry's existence is a reminder that in this country, it is wildly expensive to be poor.
Payday lenders justify their business model by protesting that they are the only ones extending credit to borrowers who would otherwise be unable to obtain it. Often, however, they are just extending 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 far stricter state and federal regulations—are reluctant to open branches and offer reasonably-priced financial services.
This brand of soft discrimination has a devastating impact on communities of color, exacerbating inequality and widening the racial wealth gap. A 2018 study found that check-cashing locations in Michigan were likeliest to appear in census tracts with higher African-American and Latino populations. A 2005 survey determined that black neighborhoods in North Carolina featured three times as many payday lending stores as white neighborhoods.
Like the Green New Deal resolution Ocasio-Cortez has championed in the House, which savvily integrates Medicare for All and a jobs guarantee into a comprehensive plan to save the planet from heat death, the Loan Shark Prevention Act is a common-sense proposal that simultaneously advances a robust social justice agenda. While many politicians tiptoe around these issues, treating their choices as blind to things like race and socioeconomic status, Ocasio-Cortez and Sanders see legislation and its impact on people—especially the most vulnerable Americans—as inextricable from one another. By crafting a solution that makes all consumer credit more affordable, they make ending these abusive practices a cause everyone can support.
Originally Appeared on GQ
