Many people who encounter credit-card interest rates as high as 30 or 40 percent (or in one celebrated case, 79 percent), or payday-loan rates topping 400 percent, ask the question: Whatever happened to usury laws?
The answer is that they remain on the books in many states, including Pennsylvania, but have become functionally irrelevant because of the U.S. Supreme Court. A 1978 ruling, known as Marquette, said banks only had to follow the laws of the states where they were based - laws in the states where their customers lived didn't matter. The quick result was that the nation's leading credit-card banks relocated to states such as Delaware and South Dakota that were willing to repeal their usury laws - in the eyes of consumer advocates, a classic "race to the bottom."
Now, Rhode Island Sen. Sheldon Whitehouse and 16 other senators, including Pennsylvania's Bob Casey and New Jersey's Robert Menendez, want to reverse the Marquette ruling with an "Interstate Lending Amendment" to the Senate's financial-reform legislation.
The amendment is sure to be fought bitterly by the national banks that dominate the credit-card industry, and by others who find the idea of limiting interest rates akin to price controls. On the other hand, it has won support from Elizabeth Warren, the Harvard bankruptcy expert, TARP watchdog, and crusader for consumers' rights:
"The loopholes that let big banks escape local laws need to be closed," Warren said via e-mail today. "There is no good reason why large institutions should be able to headquarter in states with lax protection and then do business all over the country without following local laws. Smaller banks have to comply with tougher local rules, and the big banks should have to do the same. We need a level playing field between small, community banks and big, national banks."
Thirty-two years ago, the Supreme Court essentially repealed state usury limits without a vote by legislators or Congress (and based on an 1863 statute, not the Constitution). If you think states should have the right to legislate in this area, now's the time to speak up.
Here is Sen. Whitehouse's statement:
Restore States’ Rights Against Usurious Interstate Lending
Put National Banks Back on the Same Playing Field as Local Lenders
For the first 202 years of our Republic, each state had the ability to enforce usury laws against any lender doing business with its citizens. Our economy grew and flourished during these two centuries, and lenders profited while complying with the laws in effect where they operated. A single Supreme Court case – little noticed at the time it was decided – would radically change that lending landscape.
In the 1978 case of Marquette National Bank of Minneapolis v. First of Omaha Service Corp., the Supreme Court interpreted the word “located” in the National Bank Act of 1863 as meaning the location of the business and not the location of the customer. A short few years went by before the big banks realized they could avoid interest rate restrictions by reorganizing as “national banks” and moving to states with comparatively weak consumer protections. A race to the bottom ensued as a small handful of states eliminated interest rate caps in order to attract lucrative credit card business and related tax revenue. Today, the credit card divisions of major banks are based in just a few states, consumers nationwide lack protection from outrageous interest rates and fees, and local banks are subjected to unfair out-of-state competition.
The Whitehouse Amendment, #3746, cosponsored by Senators Cochran, Merkley, Durbin, Sanders, Levin, Burris, Franken, Brown (OH), Menendez, Leahy, Webb, Casey, Wyden, Reed, Udall (CO), and Begich would restore the pre-Marquette powers of each state to protect its citizens with interest rate limits on lending done within the state. The bill is not a usury statute and does not prescribe or recommend any interest rate caps or other lending limitations. It would merely restore to each state the ability to protect its citizens from lenders based in other states.
The Whitehouse Interstate Lending Amendment would:
Restore to the states the ability to enforce interest rate caps against out-of-state lenders.
By Amending the Truth in Lending Act, cover all consumer lenders, no matter what their legal form, minimizing the opportunity for gaming by changing charter type.
Become effective twelve months after enactment – giving state legislatures time to evaluate and update usury statutes.
Level the playing field so that intrastate lenders like community banks, local retailers, and credit unions are no longer bound by stricter lending limits than national credit card companies.