States used to have the authority to enforce usury laws, capping the excessive interest rates of any lender interested in transacting business with their citizens. Although usury laws are still on the books in some states across the country, when it comes to credit cards they are rendered useless by deregulation of the industry.
Credit card deregulation began in 1978 with Marquette National Bank of Minneapolis v. First Omaha Service Corp. and continued with Smiley v. Citibank in 1996. Taken together, the two Supreme Court rulings allowed national banks to charge credit card customers the highest interest rate permitted in the bank’s home state, with fees defined as interest for the purposes of regulation. As a result, national banks physically moved their credit card operations to states, such as South Dakota and Delaware that have no usury limits. As a result, many consumers now face interest rates as high as 30 percent or more.
Demos research finds that four in ten low-and middle-income households carrying credit card debt use their credit cards to pay for basic living expenses such as rent or mortgage bills, groceries, utilities, or insurance, in the past year because they did not have enough money in their checking or savings accounts. For these households, who are financing an average credit card debt load of $7,145, high interest rates are a costly burden.
We’re on record calling for a national usury limit to contain the interest rates on credit cards and other loans. But Senators Sheldon Whitehouse and Elizabeth Warren recently proposed another idea worth considering: enabling states to once again protect their own citizens from excessive credit card interest rates.
According to the sponsors, the Empowering States' Rights to Protect Consumers Act, “would amend the Truth in Lending Act of 1968 to clarify that all consumer lenders-regardless of their location or legal structure-must abide by the interest rate limits of the states in which their customers reside.”
The idea is simple and should, in theory, appeal to the most ardent supporter of states’ rights. The downside is that while Senator Whitehouse’s home state of Rhode Island and Senator Warren’s home state of Massachusetts might well act in the public interest to curb credit card interest rates, other states would likely continue to provide the banks issuing credit cards with free rein, as some states currently do with much higher interest payday lending.