Wednesday, August 17, 2011


In looking back over my growing list of postings I've spotted a scary trend: I've written more posts with the Money label than any other topic. This could be because we are deep into a national financial crisis, or because, just as one thinks a lot about the beach in the dead of winter, I think a lot about money because I don't have much. Whichever it is doesn't really matter. Here's yet another one.

If, as I and a whole bunch of actual experts believe, the country is in a demand crisis not a too high taxes and too much regulation crisis than we need ideas that help create demand for American products and services. The Obama administration is proposing an extension of the 2% reduction in the Payroll Tax passed last December as a way to put more money in the hands of consumers who will, most likely, spend the extra money. This is fine, but since it only extends something already in place it can't really help much more than it already has. It won't create any new spending. We need something more. We need to reform the Usury Laws at the Federal level.

In brief, Usury is the act of charging too high an interest rate on loans and borrowing. Most states have such laws, as does the Federal government. And you would be very surprised to find that the legal limits are far below what Pay Day lenders, sub-prime mortgage lenders and, most importantly for this idea, credit card companies, charge their customers. Why?

Without going all lawyer on you the simple answer is that the U.S. Supreme Court ruled in the 1978 case of MARQUETTE NATIONAL BANK OF MINNEAPOLIS v. FIRST OF OMAHA SERVICE CORP. ET AL.   that National Banks can charge credit card interest based upon the Usury law of the state where the bank is located. They said basically that:
The National Bank Act provision codified as 12 U.S.C. 85,  authorizes a national banking association "to charge on any loan" interest at the rate allowed by the laws of the State "where the bank is located,"
Why does that matter, you ask? Just take a look at the address where you send payments to your credit card company. Delaware and South Dakota seem to predominate. These states, South Dakota in particular, took one look at the Marquette decision and realized that they could attract Credit Card companies who could then charge out of state borrowers based upon South Dakota's Usury rate. Of course, there is no usury limit in South Dakota. That's why so many credit card companies locate there.

So here is my proposal: Congress should amend 12 U.S.C. 85 to allow national banks to charge on any loan interest at the rate allowed by the laws of the State where the borrower resides. That's pretty much it. Of course it would have to apply to all existing balances. The screams of the bankers will be heard throughout the land, but there certainly is precedent for making changes to the terms of a credit card contract after the fact, so to speak.

The credit card contracts themselves provide the answer. They can change pretty much whatever term of the agreement that they want to and we, the borrowers pretty much have to take it. Oh, you don't want to pay the new and improved rate of 26% on your existing balance? Well, just close the account. You can't charge any more on that card, but you do have to pay the balance owed under the original terms. In my proposal the States and the Federal government would be acting for the consumers as their representatives (imagine that) in the clearly unfair and unequal contractual agreements that now exist.

The immediate result would be lower payments on high interest rate cards and other consumer loans which puts more money in the hands of consumers just like the Payroll Tax reduction, but this would act as a new stimulus rather than a continuation of an already in place tax cut. And it really isn't such a big change in the law anyway. Most states have Usury laws and have had them from the beginning. Why, even the hard core of the GOP can't bitch too much. Usury is forbidden by the Bible [Exodus 22:25] [Leviticus 25:36] [Leviticus 25:37]!

1 comment:

Dan, from the Hills said...

Good call, and easy to see why it would work too.