Comprehensive Impact Assessment of S. 381 and H.R. 1944: The 10 Percent Credit Card Interest Rate Cap Act

Jan 16

Jan 16, 2025

1. Executive Summary

The introduction of the 10 Percent Credit Card Interest Rate Cap Act (S. 381 in the Senate, sponsored by Senators Bernie Sanders and Josh Hawley, and H.R. 1944 in the House, sponsored by Representatives Alexandria Ocasio-Cortez and Anna Paulina Luna) marks a pivotal moment in the history of American financial regulation.1 By proposing a federal price ceiling on consumer credit that is historically unprecedented in its severity—capping Annual Percentage Rates (APR) at 10 percent inclusive of all finance charges and fees—this legislation seeks to fundamentally alter the pricing mechanism of unsecured debt in the United States.3

This report provides an exhaustive analysis of the legislation’s statutory mechanics, its interaction with existing regulatory frameworks like Regulation Z, and its projected economic consequences. The analysis synthesizes legislative text, financial disclosures from major retailers and banks, academic studies on usury laws, and comparative data from international markets such as Japan and France.

The findings indicate that S. 381 is not merely a restriction on interest rates but a structural prohibition on the current business models of the U.S. credit card industry. Specifically, the bill’s provision limiting fees to the total amount of finance charges assessed would effectively ban annual fees and late fees for consumers who pay their balances in full ("transactors"), dismantling the cross-subsidization model that supports widespread credit access and rewards programs.3

Key Findings:

Credit Rationing: A 10 percent cap is mathematically below the break-even point for lending to subprime and near-prime borrowers once cost of funds, operational expenses, and charge-off rates are factored in. Industry modeling suggests up to 88% of current credit card accounts could become unprofitable, leading to mass account closures.5
Retail Sector Profit Collapse: Major retailers such as Macy’s, Kohl’s, and Nordstrom derive a disproportionate share of their net income—and in some years, more than 100% of their profit—from credit card revenue sharing agreements. S. 381 would likely eliminate this revenue stream, forcing store closures and price increases.7
Fintech and BNPL Existential Threat: The Consumer Financial Protection Bureau’s (CFPB) classification of digital user accounts as "credit cards" means S. 381 would apply to Buy Now, Pay Later (BNPL) providers. The strict fee limitations could render the standard "pay-in-4" model legally untenable if late fees are assessed on zero-interest loans.9
Negative Consumer Welfare Outcomes: Historical precedents from Japan’s 2010 Money Lending Business Law revision and Arkansas’s constitutional usury cap demonstrate that severe rate caps correlate with a contraction in legal lending, a rise in illegal "loan shark" activity, and reduced consumption smoothing for lower-income households.11

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2. Legislative Architecture and Statutory Analysis

To evaluate the economic impact of S. 381, one must first deconstruct the precise legal mechanisms contained within the bill's text. The legislation is brief but contains provisions that interact with the Truth in Lending Act (TILA) in complex ways that go far beyond a simple interest rate limit.

2.1 The "All-In" APR Definition

Proposed Section 107(f)(1) mandates that the annual percentage rate applicable to an extension of credit obtained by use of a credit card may not exceed 10 percentage points. Crucially, the text specifies that this rate is "inclusive of all finance charges".3

Under current TILA regulations (15 U.S.C. § 1605), the "finance charge" is defined as the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit.13 This typically includes:

Interest.
Service or carrying charges.
Loan fees or finder's fees.
Mandatory insurance premiums.13

By explicitly capping the APR "inclusive of all finance charges," S. 381 removes the ability of lenders to unbundle costs. Currently, lenders might charge a lower interest rate but impose high origination or participation fees. Under S. 381, every penny paid by the consumer to the creditor—regardless of whether it is labeled as "interest" or a "fee"—counts toward the 10 percent calculation. This mirrors the "Military Annual Percentage Rate" (MAPR) concept used in the Military Lending Act but sets the ceiling significantly lower (10% vs. 36%).14

2.2 The Anti-Evasion Fee Ratio (The "Transactor" Paradox)

The most legally consequential and structurally disruptive component of S. 381 is found in Section 107(f)(2). This section addresses fees that are not considered finance charges under TILA Section 106(a), such as annual fees, late fees (in some interpretations), or over-limit fees. The text states:

"Any fees that are not considered finance charges under section 106(a) may not be used to evade the limitations of paragraph (1), and the total sum of such fees may not exceed the total amount of finance charges assessed." 3

This provision creates a legal paradox for "transactors"—consumers who pay their statement balance in full every month.

The Zero-Interest Scenario: A transactor pays $0 in interest (finance charges) because they utilize the grace period.
The Legal Constraint: If the "total amount of finance charges assessed" is $0, then Section 107(f)(2) dictates that the "total sum of such fees" (non-finance charge fees) must not exceed $0.
Operational Implication: This clause effectively bans annual fees, membership fees, and late fees for any customer who does not carry a revolving balance. If a cardholder pays in full, the issuer cannot legally charge an annual fee (e.g., for a premium rewards card) because the fee would exceed the finance charges (which are zero).4

This provision appears designed to prevent the "payday lending" workaround, where lenders charge low interest but exorbitant "subscription" fees. However, applied to the general credit card market, it destroys the economics of premium cards (like the American Express Platinum or Chase Sapphire Reserve) for responsible users. It implies that a bank can only charge a fee if it also extracts interest, creating a perverse incentive where banks might prefer customers who carry debt over those who pay in full.

2.3 Draconian Penalties and Enforcement Mechanisms

S. 381 introduces penalty structures that significantly increase the liability risk for financial institutions.

Forfeiture of Principal and Interest: While the text explicitly mentions "forfeiture of the entire interest," historical interpretations of usury violations in state courts often put the principal at risk as well. The bill states that a knowing violation results in the forfeiture of the entire interest the note carries.3
Private Right of Action: Section 107(f)(4) grants consumers a dedicated private right of action to recover "the entire amount of interest, finance charges, or fees paid" if the cap is exceeded. This action can be brought within 2 years of the last "usurious collection".3
- Significance: This creates a strict liability standard. If a bank’s fee calculation algorithm erroneously charges a fee that pushes the effective APR to 10.01%, or if a fee is charged to a transactor who paid zero interest, the bank could be liable for refunding all payments made by that customer over a two-year period. This creates an "uninsurable" regulatory risk that will force issuers to price credit conservatively, likely well below 10% to create a safety buffer.4

2.4 The Sunset Provision: A Five-Year Experiment

The bill includes a sunset clause, stating that the amendments will take effect upon enactment and expire on January 1, 2031.3 This temporal limitation frames the policy as a temporary relief measure, likely echoing the "emergency" rationale used during the COVID-19 pandemic or the high-inflation period of 2022-2025. However, for banks and retailers, a five-year horizon is insufficient for long-term portfolio planning. Credit card receivables are often securitized with multi-year maturities; a temporary cap introduces profound uncertainty into the asset-backed securities (ABS) markets, as the valuation of these assets would fluctuate wildly based on the legislative sunset.15

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3. Theoretical Framework: The Political Economy of Usury Caps

The debate surrounding S. 381 is not merely technical but deeply ideological, representing a collision between populist economic theories and neoclassical market principles.

3.1 The "Horseshoe" Coalition: Progressive and Populist Convergence

S. 381 demonstrates a "horseshoe theory" alignment in American politics, where the progressive left and the populist right converge on economic interventionism.

The Progressive Argument (Sanders/Ocasio-Cortez): This camp views high interest rates as predatory extraction. They argue that the poor are penalized for their poverty, paying higher rates to subsidize the rewards and "free" banking of the wealthy. The Vanderbilt Policy Accelerator study (authored by Brian Shearer) provides the intellectual bedrock for this view, arguing that banks earn "super-normal" profits and that a 10% cap would simply reduce these excess margins rather than restricting credit access.16
The Populist Right Argument (Hawley/Trump): This camp views credit card companies as oligopolistic entities that "rip off" working families. President Trump’s endorsement of a 10% cap frames it as an anti-inflationary measure to lower the cost of living. Senator Hawley’s support is rooted in a critique of corporate power and a desire to support the working-class base against "Wall Street".5

3.2 The Economic Rebuttal: Risk-Based Pricing vs. Rationing

The banking industry and conservative economists argue that interest rates are a market-clearing price for risk.

Cost of Funds + Risk Premium: The prime rate (the baseline for most credit cards) is derived from the Federal Funds Rate. In 2025, with the Federal Funds Rate hovering between 4.25% and 4.50%, the Prime Rate is approximately 7.5% to 8%.16
The Arithmetic of 10%: If the cost of funds is ~4.5% and the cap is 10%, the bank has a 5.5% margin to cover:
1. Operational Costs: Processing, fraud detection, customer service (typically 2-3%).
2. Charge-Offs (Credit Losses): For subprime borrowers, default rates often exceed 10-15%.
3. Return on Equity: Regulatory capital requirements demand a return for shareholders.
- Conclusion: It is mathematically impossible to lend to a borrower with a 10% default risk at a 10% APR if the cost of funds is 4.5%. The lender loses money on every transaction. Therefore, rational lenders will cease lending to any borrower whose default risk exceeds ~2-3%.20

3.3 The "Subsidization" Debate

A core tension in the debate is cross-subsidization.

Current Model: High-interest revolvers (often lower-income or lower-credit score) subsidize the rewards and free services enjoyed by transactors (often higher-income).
S. 381 Effect: By capping the revenue from revolvers, the bill forces an "unwinding" of this subsidy. However, because Section 107(f)(2) prevents shifting costs to transactors via fees (if they pay no interest), banks cannot re-price the transactor segment. This leaves banks with no mechanism to recoup costs, leading to a total market contraction rather than a redistribution of costs.22

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4. Consumer Credit Market Dynamics: Availability and Cost

The implementation of S. 381 would precipitate a swift and severe restructuring of credit availability in the United States.

4.1 The Magnitude of Credit Rationing ("Debanking")

Industry analysis suggests a catastrophic reduction in credit access.

Subprime Exclusion: The American Bankers Association (ABA) and Bank Policy Institute (BPI) estimate that nearly 95% of subprime borrowers (credit scores below 660) would lose access to credit cards. This is because their risk profile requires an APR significantly above 10% to break even.21
Impact on Revolvers: BPI data indicates that two-thirds of all cardholders who revolve balances would see their credit lines cut or cancelled. This amounts to approximately 14.3 million households immediately losing access to their primary liquidity tool.25
Comparison to Vanderbilt Study: Even the pro-reform Vanderbilt study admits that lending would likely cease for borrowers with FICO scores below 600. However, they argue that for scores between 600 and 760, banks could maintain profitability by cutting marketing expenses. Critics note this assumes banks will accept lower margins rather than reallocating capital to other asset classes (like treasuries or corporate debt).16

4.2 The End of Rewards Programs

Credit card rewards (cash back, airline miles, points) are a massive component of the U.S. consumer economy, funded by interchange fees and interest income.

Economic Reality: Rewards serve as a customer acquisition cost. If the lifetime value of a customer drops due to the APR cap, banks cannot afford high acquisition costs.
Quantification: The Vanderbilt study estimates a $27 billion reduction in annual rewards, primarily affecting mass-market cards. However, industry analysts suggest the reduction would be near-total. With margins compressed to nearly zero, banks would eliminate 1.5% - 2% cash back programs immediately.26
Impact on Travel Industry: Airlines and hotels rely heavily on co-branded credit card revenue (e.g., Delta/Amex, Marriott/Chase). A reduction in rewards issuance would directly hit the loyalty programs that are often more profitable than the airlines' flight operations themselves.28

4.3 The "Transactor" Squeeze and Annual Fees

As detailed in the legal analysis (Section 2.2), S. 381 creates a trap for issuers regarding transactors.

Scenario: A bank wants to maintain a premium card for prime borrowers. Since they cannot charge >10% interest, they might try to charge a $500 annual fee.
The Trap: If the customer pays in full, finance charges are $0. The bill says non-finance charge fees (the annual fee) cannot exceed finance charges. Thus, the annual fee must be $0.
Result: Banks would be forced to cancel accounts for transactors who do not generate enough interchange revenue to cover their own servicing costs and fraud risks. This could lead to a weird inversion where having too good a credit score (and paying in full) makes you an unprofitable customer that banks want to "debank".4

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5. The Retailer Ecosystem Crisis: A Deep Dive

While banks are the direct targets, the U.S. retail sector faces collateral damage that could rival the "Retail Apocalypse" of the 2010s. Major department stores rely on Private Label Credit Cards (PLCC) not just for sales facilitation, but as a primary engine of corporate profit.

5.1 The Profit Sharing Model

Retailers partner with banks (e.g., Macy's with Citi, Target with TD Bank, Kohl's with Capital One) to issue store-branded cards. These cards typically carry APRs of 25% to 32% to offset the high risk of the customer base (often thin-file or lower-income shoppers). The retailers receive a "profit share" from the bank, which flows directly to their bottom line.

5.2 Financial Exposure of Key Retailers (2023-2024 Data)

The following table reconstructs the financial dependence of major retailers on credit card revenue, based on their SEC filings and earnings reports.

Retailer	Financial Metric (2023/2024)	Credit Card Revenue Impact	Data Source
Macy's (M)	Net Income: ~$105M (FY2023) Credit Card Rev: $537M (Net)	Credit card revenue was 511% of Net Income in 2023. Without credit card revenue, Macy's would have posted a massive operating loss. A 10% cap would obliterate this revenue, as store cards cannot operate at 10% given their risk profile.	7
Kohl's (KSS)	Net Income: ~$317M (FY2023) Other Revenue (Credit): $890M	Credit revenue ("Other Revenue") was nearly 3x Net Income. Kohl's is arguably the most exposed major retailer. The elimination of this revenue stream would likely force immediate restructuring or bankruptcy.	31
Nordstrom (JWN)	Net Earnings: $134M (FY2023) Credit Card Rev: $474M	Credit revenue was 3.5x Net Earnings. While Nordstrom has a higher-end customer, their card portfolio is a critical profit center. Loss of this revenue would erase all corporate profitability.	33
Target (TGT)	Net Earnings: ~$4.1B (FY2023) Other Revenue: ~$1.6B	Target is less dependent than department stores but still generates significant margin from its RedCard (Circle Card). The 5% discount is funded by interchange and interest savings; this benefit would likely vanish.	36

Analysis of Retail Fallout:

The implementation of a 10% cap would render private label credit cards (PLCCs) economically unviable. PLCC charge-off rates are typically 2-3x higher than general purpose cards. At 10% APR, banks would terminate these partnership agreements.

Consequences:
1. Immediate Loss of Net Income: As shown above, retailers like Macy's and Kohl's would swing from profitability to deep losses.
2. Sales Decline: Store cards drive loyalty. Kohl's cardholders, for instance, shop more frequently. Without the card (and its associated discounts/coupons), "top-line" sales would contract.
3. Store Closures: To regain profitability without credit revenue, retailers would need to close underperforming stores and cut labor costs aggressively.

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6. Fintech, BNPL, and the Definition of "Credit Card"

S. 381 poses an existential threat to the Fintech sector, particularly Buy Now, Pay Later (BNPL) providers like Affirm, Klarna, and Afterpay.

6.1 Regulatory Convergence

In May 2024, the CFPB issued an interpretive rule classifying providers of digital user accounts (digital wallets used for BNPL) as "card issuers" under Regulation Z (TILA).9

The Nexus: Because S. 381 amends TILA to cap rates for "credit cards," this new CFPB classification drags BNPL providers directly under the 10% cap.

6.2 The Fee Trap for "Pay-in-4"

The standard "Pay-in-4" model charges 0% interest but relies on merchant fees and late fees for revenue.

Application of S. 381: If a BNPL loan has 0% interest, the finance charge is $0.
The Trap: Under Section 107(f)(2), if finance charges are $0, total fees must be $0.
Result: BNPL providers would be legally prohibited from charging late fees or missed payment fees. Without the threat of late fees to enforce repayment discipline, default rates would skyrocket, destroying the unit economics of the product.39

6.3 Innovation Chill

Fintech lenders often serve "thin-file" customers by using alternative data (cash flow underwriting). This segment is riskier than prime borrowers. If the APR is capped at 10%, fintechs cannot price for this risk. This would effectively freeze innovation in credit scoring, forcing fintechs to retreat to serving only super-prime customers, duplicating the services of traditional banks rather than expanding inclusion.41

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7. Comparative Analysis: International and Domestic Precedents

History provides concrete examples of the consequences of strict rate caps. The experience of Japan is particularly instructive for forecasting the U.S. outcome.

7.1 The Japanese Experience: The 2006/2010 Money Lending Business Law

Japan implemented a strict cap reduction following a 2006 Supreme Court ruling, lowering the maximum rate from 29.2% to 20% (and 15% for larger loans) and restricting total borrowing to one-third of income. The rollout was fully effective by 2010.

Outcomes (2006-2011):

Market Contraction: The consumer finance market shrank by approximately 60%. Outstanding loans collapsed from ~10.6 trillion yen in 2006 to ~2.7 trillion yen in 2011.42
Supply Shock: The number of registered moneylenders plummeted from ~14,000 to roughly 2,000. Major lenders like Takefuji filed for bankruptcy due to the inability to sustain operations at lower rates and the burden of retrospective interest refunds.11
Acceptance Rates: Loan approval rates crashed from over 50% (pre-reform) to approximately 26% (post-reform), with some lenders accepting as few as 7% of applicants.44
Rise of Loan Sharks: The demand for credit did not disappear; it moved underground. Police data showed a sharp rise in Yamikin (illegal loan sharks) victims, as borrowers rejected by legal lenders sought liquidity at astronomical illegal rates.11

7.2 The French Usury System

France employs a floating usury rate (approx. 133% of the average market rate). While less rigid than a fixed 10% cap, it has caused severe market dislocations.

2023 Mortgage Crisis: As the European Central Bank (ECB) raised rates to fight inflation, the French usury rate (calculated on past data) lagged behind the actual cost of funds. This created a "scissors effect" where banks could not legally lend at a profitable rate. Mortgage production froze, locking thousands of buyers out of the market until the regulator adjusted the calculation frequency.46
Exclusion: While French households have lower debt burdens, access to credit is far more restricted than in the U.S. or UK. Low-income borrowers are effectively priced out of the legal market entirely.48

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8. Estimated Financial and Fiscal Impact

The financial impact of S. 381 extends beyond the balance sheets of banks to the federal government and the broader economy.

8.1 Impact on Taxpayers and Government Revenue

Corporate Tax Revenue Decline: The U.S. banking sector is a massive contributor to corporate tax receipts. Credit card operations typically generate a Return on Assets (ROA) of 4-6%, compared to 1% for general banking.23 Capping rates at 10% would eliminate these "super-normal" profits.
- Retail Impact: As noted in Section 5, retailers like Kohl's and Macy's would see taxable income wiped out.
- Result: A significant structural reduction in federal and state corporate income tax revenue, likely in the range of billions of dollars annually.
Capital Gains Tax Loss: The market capitalization of credit card issuers (Capital One, Synchrony, Amex, Discover) and major banks would collapse. This would result in capital losses for investors, reducing capital gains tax revenue for the Treasury.49

8.2 Impact on Specific Industries

Banking: Small community banks and credit unions would be hit hardest. Unlike megabanks, they lack diversified revenue streams (like investment banking) to subsidize consumer lending. Credit Unions, currently capped at 18%, argue that 10% is below their cost of doing business, potentially forcing many to merge or liquidate.50
Debt Collection: The bill’s strict penalties and 2-year clawback provision would make the purchase of distressed debt highly toxic. The secondary market for credit card debt would likely freeze, leaving banks holding bad loans and further tightening lending standards.

8.3 Macroeconomic Effects (Consumption and Inflation)

Aggregate Demand Shock: Consumer spending drives ~70% of U.S. GDP. Access to credit allows households to smooth consumption (e.g., buying a washing machine when it breaks). If 14 million households lose this liquidity tool (as BPI predicts), aggregate consumption would decline, acting as a deflationary drag on the economy.6
Alternative View (Stimulus): Some proponents argue that for those who retain credit, the lower interest payments (saving $100 billion/year) act as a stimulus. However, given the likely severity of credit rationing, the net effect is likely negative—money saved on interest is irrelevant if the credit line is cancelled.20

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9. Conclusion

The 10 Percent Credit Card Interest Rate Cap Act represents a legislative attempt to solve the crisis of household debt through direct price control. While the motivation—relieving the financial burden on working families—is grounded in the reality of high borrowing costs, the structural mechanics of the bill ensure that its costs will be borne primarily by the very consumers it intends to protect.

The "all-in" APR definition and the strict fee-to-finance-charge ratio create a legal environment where lending to subprime borrowers becomes mathematically impossible and servicing "transactors" becomes legally perilous. The result would not be 10% interest rates for everyone, but rather 10% rates for the wealthy (who already have access to cheap capital) and zero access for the working class and subprime borrowers.

Summary of Likely Outcomes:

Mass Debanking: Millions of low-credit-score Americans will lose their credit cards.
Retail Crisis: Department stores will face an earnings crisis as their profit engines (credit portfolios) stall.
End of Rewards: The era of cash-back and travel points will end for the vast majority of consumers.
Rise of Shadow Banking: Demand for credit will migrate to predatory, unregulated, or high-cost alternative lenders, mirroring the post-reform landscape of Japan.

The bill, therefore, presents a classic economic trade-off: it creates a "gold-plated" credit product (10% rate, no fees) that is so expensive to provide that it can only be offered to the most affluent, risk-free customers, effectively regressing the democratization of credit that has occurred over the last four decades.

Recommendations for Further Study

Credit Union Viability: Further research is needed to quantify the specific break-even APR for small credit unions that lack economies of scale.
Legal Stress Testing: A detailed legal analysis of Section 107(f)(2) is required to determine if there is any interpretation that allows annual fees for transactors, or if the "zero interest = zero fees" reading is absolute.
State Override Preemption: Analysis of whether S. 381 would preempt state laws that might allow higher rates for specific small-dollar loans to prevent credit deserts.

End of Report

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Victor Acorda