Someone posted a link to a loan application with a 177.4% interest rate. I looked around and found a Texas bank charging 531% and another DUer said he had a $300 Payday loan with 1024% in the fine print. Aren’t there usury laws? How the hell did we get to 1000% interest?
First, a bit of history. Usury regulation dates back to the earliest records of civilization. Most usury law has its roots in religion. Islam forbids charging interest altogether and in the 13th century the Catholic church set the usury rate at 5% with the Protestant faith following with Martin Luther saying that rates of 6% or lower were moral. Ben Franklin said that “when you run in debt you give to another power over your liberty.” Prior to 1978 each state set it’s own limit to interest charged in consumer loans, the highest being 10%. Then, in 1978, the Supreme Court ruled in Marquette National Bank vs First of Omaha that national banks could export the interest rate from the state of loan origin to any state the borrower resides in. That’s when all hell broke loose.
In the late ‘70s banks were experimenting with a new concept: the credit card. Citibank, headquartered in New York, issued tens of thousands of credit cards in an effort to broaden its borrower base. Everything was just ducky until the inflation rate went nuts and the prime rate rose to 20%. New York state law limited consumer interest to 6%. Do the math. Did the free market rule and Citibank go out of business because it made bad marketing decisions? Nope. They shopped around until they found South Dakota and Gov. Bill Janklow (R-State Prison). S. Dakota was considering updating their usury laws to reflect current inflation trends when Citibank contacted the governor and suggested eliminating them entirely for the promise of importing jobs. In 24 hours the legislation was written and passed. Citibank put 3000 jobs in the state and could effectively charge any interest rate they wanted. Delaware and half dozen other states followed suit. State banks were at a severe disadvantage, so they pressured state legislators and guess what; they passed legislation to give parity, effectively repealing state usury laws.
Next banks discovered that some customers were paying the charges before any interest incurred. What to do? Charge annual fees for holding the cards. That didn’t fly so they replaced annual fees with punitive late fees that netted the banking industry $30 billion in profits last year. Credit card issuers charge the merchant 1-4% of each transaction, the card holder up to 39% interest and the card agreement you sign allows the bank to change the terms of their loan at any time, effectively changing the interest rate on money you have borrowed retroactively. What other contract do you sign gives that flexibility to the other party?
Think it can’t get any worse?
Enter the Payday lender. Once known as salary assessment loansharks that are illegal under federal law they simply renamed themselves and made a small adjustment in the way contracts are written. Between 2000 and 2004 the number of payday lenders doubled to reach a number greater than McDonalds, Target, JC Penny, Sears and Burger King combined. The number is expected to double again by 2010. These offices are congregated around military bases and poverty stricken areas. Although state usury laws still apply to non-bank entities like payday lenders they skirt the law by creating in-house brokers to which they pay fees passed on to the lender. Many Payday lenders don’t even use contracts, simply asking for a postdated check for the amount of the principal plus any “loan fees” to be deposited at the term of the “loan”. If the check bounces they assess a returned check fee and extend the “loan” with another “loan fee” added. They then work out repayment over time with the threat that they will report the default to credit reporting agencies. Taken in their entirety the “loan fees” plus returned check fees add up to 5000 to 7000% interest if computed using the Truth in Lending act methodology. Payday loans are not short-term loans; they grow into medium to long-term debt. If a borrower can’t come up with $325 today what are the chances they can come up with $375 two weeks from now? Last year Congress limited the interest rate for payday loans to active military personnel to ONLY 36%.
If congress can limit interest nationally for active military personnel, why won’t they do the same for the rest of us? Because the banking lobby is #3 behind the drug and insurance lobbies (the Military Industrial Complex isn’t a lobby, it’s a branch of government headed by Cheney). Every change in law since 1978 has been to the benefit of the banking industry to the detriment of consumers. Next time you hear somebody talk about the free market hide your wallet.
Sources: The Mythology of American Usury Law, Christopher Peterson, Associate professor of law; University of Florida
http://legalhistoryblog.blogspot.com/2007/07/peterson-on-mythology-of-american-usury.htmlFrontline PBS
http://www.pbs.org/wgbh/pages/frontline/shows/credit/more/rise.htmlThe History of Payday Loans
http://www.thehistoryof.net/history-of-payday-loans.html
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