Time to Fix Our Usury Laws

02/24/2005

Paul Munnis

From Time to time we comment on legislation that we are in dire need of in America and in Minnesota. Today we are going to talk about the levels of credit card interest being charged people and how it’s a rip off that State and Federal lawmakers are ignoring on purpose and how they will continue to do so unless you demand changes.

Today a person signs up for a credit card at an 11% interest rate and finds that he has just been increased to a 30% interest rate. With a $12,000 balance at 30% he cannot pay off the card and is forced into bankruptcy. The consumer has been ripped off by a credit card company. When he signed up for the card his interest was posted monthly. It’s just been changed over to a fourteen day widow increasing the compounding cycle and raising the debt. The debtor did not agree to this explicitly. He has been ripped off by a credit card company. It’s increasing his debt burden. There outta be a law.

We have had this happen before in America, back in the 80’s. The States and Congress said: “enough of this.” They instituted usury laws which rolled interest rates on loans back to just 2% above the prime lending rate. That put an end to the gouging. For awhile. Now they’re back.

The scammers are back and they are ripping off the public. It’s time to get out the old laws and dust them off and pass them again. It’s not just banks either. A lot of businesses are running these credit card scams, for example department stores and convience store chains.

Some have usury laws but they aren’t working.

According to Bankrate.com: Usury is defined as “charging a price for credit that exceeds the limits set by law. But these laws offer less protection than most consumers realize.”

Bankrate.com goes on to say that:

The reality for consumers is unless you get an Arkansas bank card which has managed to maintain its state laws [on fees], you just have to accept the fact that the interest rate and fees are not regulated and they could go up,” said Gerri Detweiler, credit educator and author of the Ultimate Credit Handbook. “It’s truly a buyer beware (situation).”

“There aren’t many protections left for the consumer and it’s frustrating for consumer advocates, who are trying to level the playing field,” she added.

Some states don’t have usury caps, and in those that do, federal law usually supersedes state law when it comes to setting rates and fees.

They say that this trend began in the late 1980s. Most big banks packed up and moved their credit card operations to “debtor-friendly” states such as Delaware, said Steven Palmer, managing partner and a specialist in usury law at Palmer, Allen & McTaggart, a corporate law firm in Dallas.

The lure was “being able to charge higher fees,” Palmer said. “When some of the banks left Texas, several of the credit card operations were spun off. Mercantile National Bank became Mcorp and they transferred to Wilmington, Delaware. That became Lotmus, which is now FirstUSA. As banks were failing, they moved so that they could be able to charge higher fees.”

Do you notice a trend here? We had real estate fraud on a massive scale at the same time. It came from the same Texas banks. Now Texas banks are leading the way for scamming the public on consumer debt. We gave total control of the U.S. Government to these Texas good ol ‘boys via Bush patronage and without any checks or balances. What a mistake that was.

According to the consumer reports here are the top dirty tricks used by credit card companies.

The old bait and switch

So you’ve got this ingenious plan. You’re going to apply for a great credit card that gives you tons of frequent-flier miles, put all your shopping on it, and then head to the Bahamas in February. Stop—the miles you earn, if any, might get you no farther than Hope, Ark.

When and if you get that card, study the terms carefully. If you don’t qualify for the great card, the credit card company can send you a completely different card with different terms. If it’s not what you want, don’t activate the card. Call the company and cancel the account.

No limit on rates in 26 states

There are 26 states that have no limit on what bank credit card issuers can charge for interest rates, according to the American Bankers Association. Issuers in 27 states have no limit on what they can charge for annual fees.

California, Delaware, South Dakota and Tennessee are among the states offering the least protection. These four states currently have no maximums on the following:

• delinquency fees
• cash advance fees
• over-the-limit fees
• transaction fees
• stop payment fees
• ATM fees
  mandatory grace period
  

Arkansas the most consumer-friendly

Currently, Arkansas has the most consumer-friendly laws for capping credit card rates and fees.

Each state’s legislative body sets the restrictions on what banks can charge, according to the ABA.

“It’s been a real problem for state legislators because what happens is that they try to institute a law that applies to businesses in their states and those companies will move out of the state to sideswipe the law but still send credit cards to people who live in that state” said Detweiler.

The action pending in New York state seeks to limit interest rates at 15 percent on all cards whether the issuer is based in New York or not.

Court decision paved the way

Credit card issuers scored a sweeping victory in 1978 when the Supreme Court ruled in Marquette vs. First Omaha Services that it was legal for nationally chartered banks to export more costly terms of their cards to states where the laws regarding interest rates restricted such practices.

The card issuer need only follow the law of the state in which its credit card operations are located.

At first, department store cards did not fall under the ruling. They varied interest rates according to the laws of the states where each cardholder lived. But in 1987, federal law changed. Now retailers can create special-purpose “credit-card” banks that can export credit card rates under the Marquette decision.

Retailers open special credit card banks

“A number of large card-issuing chains have opened up these special banks and are sending their high-priced cards into states where ceilings are lower,” Detweiler wrote in her book, “a trend that is likely to continue.”

The primary federal usury laws are contained in the National Bank Act (NBA) and the Depository Institutions Deregulation and Monetary Control Act of 1980.

“Back in the 1980s, when rates would go as high as 23 percent, there was a move in Congress to impose a usury law,” said Philip Farley, manager of regulations assistance at the Federal Reserve Bank of Philadelphia, which regulates banks in Pennsylvania, a portion of Delaware and New Jersey. “But the lobbyists said it was counterproductive because if rates were too low, lenders would not allow for mortgages or credit cards,”

Usury caps a waste of time?

And some economists said usury caps were a waste of time because the Truth in Lending Act guaranteed that issuers would disclose rates, Farley said. They believed the required disclosures would direct consumers away from high charges.

As a result, there is no federal cap on rates. “The federal government only requires that whatever rates, fees or terms are set by issuers be disclosed to the consumer in accordance with the Truth in Lending Act,” said Farley.

The cost of credit card debt is enormous. According to a Consumer Federation of America report released last December, credit card debt amounted to $452 billion. That total amounts to an average of $7,000 in debt for the estimated 55 million to 60 million households with credit cards.

With the exception of such states as Arkansas, New Hampshire, Ohio and New Mexico that are more cardholder-friendly, consumers have few choices.

Issuers won another round in a landmark 1992 case. Barbara Smiley, a Los Angeles credit card customer of Citibank’s sued over a $15 late fee she was assessed. California law does not allow such charges, and she filed on behalf of all the state’s Citibank credit customers who had been hit with late fees.

National banks levy charges nationwide

The Supreme Court had ruled in 1978 that a national bank could impose any credit rate allowed by the state in which it is located. In Smiley’s case, the court ruled the term “interest” encompasses late-payment fees.

The Comptroller of the Currency, the federal official in charge of regulating banks, previously had ruled that such late-payment fees are valid anywhere Citibank customers reside, and the court ruled in the issuer’s favor.

The California Supreme Court previously had reached the same conclusion.

Consumer advocates say it wouldn’t hurt to find out where a bank’s credit card operation is located. Though location is not the sole reason issuers increase fees, it may give some inkling about how high rates can go.

Meanwhile, Lohn doesn’t use the Citgo card because there’s a Mobil station nearby, but he does keep the card as a reminder of the impending state bill.

“My question was why would New York charge 21 percent but other states only charge 6 percent? What’s the justification? It’s good to know that there’s a bill that would keep the interest rates from going higher than 15 percent

What to do?

You need to start a web effort at getting to your state legislators and governors demanding that Minnesota emulate Arkansas in terms of consumer protection.

An e-mail campaign complete with a preaddressed letter to your representatives at the State and Federal level would be very appropriate.

It’s good business for Minnesota too because as people seek cheaper credit rates they will come for Minnesota issued cards because they are protected if the laws are consumer friendly and the Minnesota banks advertise nationally. As the debt swings over to Minnesota banks so will the income from the interest. Up goes the payments to the state on earnings from banks and up goes state revenues. As a result the other states will be forced to pass the same or even tougher laws in order to retain the business for their state.

As the old bromide goes: “We’re mad as he__ and we ain’t gonna take it no more.”

Want to learn more: click on the link below:

http://www.bankrate.com/brm/rate/cc_home.asp?link=1