Usury Bill

[Joanne98]

posted by Adam Levitin
This week Senator Richard Durbin (D-IL) introduced a federal usury bill, S.2387, the Protecting Consumers from Unreasonable Credit Rates Act. I haven't found a copy of the bill yet, but according to Durbin's website, the bill:

• Establishes a maximum interest rate of 36% on all consumer credit transactions, taking into account all interest, fees, defaults, and other finance charges.
• Clarifies that this cap does not preempt any stricter state laws.
• Applies civil penalties for violations including nullification of excess charges, fines, and prison.
• Empowers attorneys general to take action for up to three years after a violation.

There are four major points to make about this legislation. First, it would restore an important element of democratic political accountability to consumer protection in financial services. Second, it would significantly restore states ability to protect their own citizens. Third, it offers a solution to the problems of financial products being structured so as to avoid APR disclosures and to catch consumers with hidden fees. And fourth, it represents a very important first step in a legislative process of rethinking the model of credit industry regulation.


1) It's worth remembering that the Supreme Court's 1978 decision in Marquette did not nullify state usury laws--they are still on the books, and the National Bank Act still subjects national banks to usury laws. Marquette merely held that the state usury law that applies to a national bank is that of the state in which the bank is based. It did not hold that usury laws do not apply to national banks, even if that has been the practical effect. While the effect of Marquette was to allow a regulatory arbitrage as banks moved to states with no or very high usury caps, national banks are still subject to any applicable usury law.

The Durbin bill is actually an important measure to restore democratic (small "d") political control over consumer protection. The Durbin bill merely ends a regulatory arbitrage created by a Supreme Court decision that was driven by a reading of 19th century banking law, rather than any considered policy position. The current regulatory arbitrage situation is affirmatively undemocratic and contrary to the principle that people should choose, through their elected officials, the laws that govern them. At present a couple of rogue states can export their lax lending regulations to the rest of the country. If Delaware and South Dakota voters are willing to forgo a mainstay of consumer protection in lending, that's their own business. But why should Delaware or South Dakota voters get to effectively choose the consumer protections for residents of Illinois or Maryland? Making usury regulation a federal matter allows for a fair, democratic debate on whether lenders should be subject to usury limits and, if so, what those limits should be.

2) The bill would put states back in the consumer protection game--a traditional area of state police power. Federal regulators have either been willfully somnolent (OCC, OTS) or without sufficient authority (FTC, FDIC) to engage in meaningful consumer protection in financial services. State attorneys general have lacked authority because of preemption issues post-Marquette, but they do not lack in motivation to enforce consumer protection laws. And, attorneys general do not have the problem of state banking commissioners, the OCC, and OTS, of not wanting to scare away chartering business by engaging in rigorous consumer protection. An interesting question (which will depend on the text of the bill) is whether Marquette would still apply within the 36% cap. If Illinois decided that a 28% cap was more appropriate, would this apply to all national banks lending business in Illinois or just to those based in Illinois (as well as to all non-national banks, assuming away all parity legislation).

Continued>>>

http://www.creditslips.org/creditslips/2008/07/usury-bill.html#more

In case anyone is not familiar...

If/when this bill is officially introduced, you should be able to track it's progress - and the progress of any other House or Senate bill or resolution - at http://www.thomas.gov .

[JDPriestly]

1. Kicked and Recommended but .........

36% is way too high especially considering that banks are paying ordinary savers as little as 1.9% (possibly even less), and you have to look around to get 3.5 or 4.0% for your life savings.

[DJ13]

2. Its a start, but that interest rate cap is twice as much as it should be