10 Mar, 2010
Time for a federal rate cap for payday lenders and credit cards
So the Senate Banking Committee is trying to hash out legislation creating a new consumer protection agency that would have the power to write and enforce rules governing payday lenders, debt collectors and other financial companies that are not part of banks. Sen. Bob Corker (R-TN) is pushing to exempt the payday loan industry from the enforcement part. The agency would be able to write all the rules they want; they just couldn’t do anything about it when a payday lender broke them. This follows serious lobbying by the Community Financial Services Association, (CFSA), a trade group of pay-day lenders created in 1999 by W. Allen Jones, founder of Check into Cash, and others in the industry.”
It’s past time for the federal government to bring an end to the exorbitant interest rates charged on credit card and payday loans. The federal government and the Supreme Court have undermined states’ attempts to regulate the interest rates charged by a series of loopholes provided to credit card providers and, now, payday lenders. It’s up to Congress to provide reasonable limits and give their rules teeth. They bought it, they own it.
In 1978 the Supreme court ruled that national banks can apply the state interest rate law of their home state in any other state where they do business. Not surprisingly, South Dakota quickly eliminated their interest rate cap and attracted New-York based Citibank. Ever notice how many credit card providers are based in Delaware? Federally chartered banks were then exempted from state usury laws in 1980.
In 1982, Arkansas passed a cap of 5 percent above the federal discount rate, leading to Arkansas banks offering some of the lowest credit card interest rates in the country. The Gramm-Leach-Bliley Financial Modernization Act, passed by the U.S. Congress in 1999, allowed state-chartered banks to charge interest rates equal to those charged by other banks operating in their state. So much for the little guy.
It hasn’t always been this way. Usury has been abhorred since Biblical times. The Prophet Ezekiel put it in the same category as murder, rape, robbery, and idolatry. The Code of Hammurabi limits interest. The Greeks, the Romans, Charlemagne, the British, the United States (until the early 1900’s) all strictly limited or prohibited interest. Heck, even Adam Smith recommended an interest rate cap. In the last 30 years, it’s been a steady move toward deregulation and the consumer be damned.
In 2006, Congress capped payday loans to the active military at 36%. The rest of us can pay 400% or more. If it’s wrong to charge members of the military that much, it’s wrong to charge the working poor so much that their situation is only made more desperate. Florida actually has one of the more restrictive payday loan rules: maximum of $500, only one loan at a time, no rollover. Still, a 14-day $100 loan carries a hefty APR of 390%. Worse, the out of state lenders can use the laws of their home state to circumvent restrictions. Sound familiar?
Clearly, banks, credit card lenders, and payday loan companies are not going to voluntarily say, “We can’t charge that much. It’s just obscene.” The American people need protection from predatory lending. It’s time for our representatives in Congress to stop allowing these lenders to prey on hard-working, vulnerable Americans. Hopefully, Sen. Corker and the rest of the Senate Banking Committee will read their Bibles.