Personal debt can stand as an insurmountable obstacle to Americans wishing to build assets and secure a place in the middle class. In addition to the critical last resort of bankruptcy relief, Americans need fair rules to ensure that lenders – from credit card companies to mortgage lenders to vendors of payday loans – don’t impose excessive interest rates, fees, and penalties that make it easier for American to get into serious debt and harder for them to get out.
Although usury laws are on the books in some states across the country, they are rendered useless by deregulation of the credit industry. Deregulation of the industry began in 1978 with Marquette National Bank of Minneapolis vs. First Omaha Service Corp. and continued with Smiley vs. 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.
The consequences of deregulation have been pervasive usury among credit card companies, with devastating effects on the ability of Americans to accumulate and protect financial assets. And usurious interest rates are not unique to the credit card industry. The entire credit industry is engaging in usurious practices. The payday loan industry charges some of the highest interest rates of any type of creditor, and rates as high as 400 percent annual percentage rate are not uncommon. Through refund anticipation loans (RAL), the tax preparation industry is also engaging in usurious lending behavior.
Recent legislation has helped to rein in some of the worst abuses of the lending industry. The Credit CARD Act of 2009 successfully increased the transparency of rates and fees without pushing rates up.1 The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the Consumer Financial Protection Bureau (CFPB), an agency with tremendous potential for ensuring a fair marketplace for financial products.
- Enact a set of National Usury Limits that would be floating, indexed to a Federal Rate, and potentially tiered based on the credit product (e.g. student loans, short-term “payday” loans, credit cards). This step would enable lenders to continue using risk-based pricing, but put an end to routine credit card interest rates of 20 and 30% above prime or payday loans at 400%, all of which are unjustifiable by any measure.
- A credit card issuer may not impose any late fee or charge greater than $15 on borrowers who fail to make a payment on or before the due date for payments.
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- Joshua M. Frank, “Credit Card Clarity: Card Act Reform Works,” Center for Responsible Lending (June 2011). http://www.responsiblelending.org/credit-cards/research-analysis/credit-card-clarity.html
- Lake Research Partners, “New Poll: Broad Bipartisan Support for Financial Reform and Consumer Protections,” Center for Responsible Lending (July 2011). http://www.responsiblelending.org/mortgage-lending/policy-legislation/regulators/new-poll-broad-bipartisan.html