Americans for Tax Reform led a coalition letter urging members of Congress to oppose regulatory proposals that would impose distortionary price controls on credit cards, including interest rate caps, fixing interchange fees by the Federal Reserve, and the passage of the Credit Card Competition Act.
The letter warns against passing the Credit Card Competition Act (CCCA) as a means of rent-seeking which will have no discernible benefit to consumers, explaining the pitfalls of similar legislation enacted in the past:
Special interest groups are again trying to use the federal government to alter the credit card market to enrich themselves at the expense of consumers. This textbook rent seeking behavior – pre-Milei Argentine Peronism – is anathema to free market principles and should be staunchly opposed by Republican lawmakers.
There is also no evidence that this bill will pass savings down to consumers. A report from the Government Accountability Office stated that if the regulations in the Durbin amendment “had not been implemented, 65 percent of noninterest checking accounts offered by covered banks would have been free.” Additional regulation on credit interchange will affect fees and interest in the credit market, thus increasing costs for consumers.
The letter also calls on members of Congress to oppose lowering the price cap on interest rates, as Senators Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) have suggested. The letter provides evidence from the Federal Reserve and Congress, both of which observed the deleterious effects of interest rate caps:
Congress already recognized that rate caps are distortive. Prior to 1980, the Federal Reserve’s Regulation Q imposed interest rate caps on bank deposit accounts. Regulation Q was gradually phased out between 1980 and 1986. According to a document published by the Federal Reserve Bank of St. Louis, “Congress concluded that interest rate ceilings created problems for depository institutions, discriminated against small savers, and did not increase the supply of residential mortgage credit.”
The coalition then explains why interest rate caps are counterintuitive in nature and harm low-income individuals who rely on special types of credit such as payday loans and other versions of short-term financing.
According to data from a Federal Reserve report, 22 percent of Americans are unbanked or underbanked. Unbanked Americans have no bank account, and the other 16 percent of Americans who are underbanked have bank accounts but rely on payday loans and other short- term financing. One article in the Fordham Journal of Corporate & Financial Law from 2007 describes how payday lender profit margins are 7.6% compared to 13% for commercial lending institutions. A cap on rates would further reduce margins for lenders and limit access to credit for consumers. This market distortion would ultimately reduce the availability of lending services, which would hurt lower-income borrowers who need immediate access to credit to pay for rent, groceries, or utilities.
The letter concludes by calling on lawmakers to remain committed to free-market principles, requesting that members of Congress oppose any reintroduced version of the Credit Card Competition Act (CCCA) or price controls on credit cards:
We believe price controls on interchange fees or interest rates are diametrically opposed to free market principles. We encourage all lawmakers to oppose a reintroduced Credit Card Competition Act and any attempt at price controls for credit cards.
Read the full letter here.
