May 9, 2010

Protecting Consumers from Unchecked Interest Rates

As we continue to fight in the Senate to reform Wall Street regulation and establish an independent consumer protection agency, I hope to also address a problem that has caused considerable pain for so many American families: runaway credit card interest rates.

Credit card companies charge interest rates that until recently would have been illegal in most states, but states are now powerless to stop it. It was not always this way: 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. Then, in 1978, came an apparently uneventful Supreme Court case – little noticed at the time it was decided.

In 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 to mean that, in a transaction between a bank in one state and a consumer in another, the transaction is governed by the bank’s state. It did not take long before the big banks saw a loophole: they could avoid interest rate restrictions by reorganizing as “national banks” and moving to states with the worst consumer protections.

Sure enough, today the credit card divisions of major banks are based in just a few states, and consumers in all our other states are denied protection from outrageous interest rates and fees. This offends both justice and history.

The Code of Hammurabi in the Third Millennium BC limited interest rates; Hindu Laws of the Second Century BC limited interest rates; and Roman law limited interest rates. The ancient tradition of protecting citizens against excessive interest rates carried to America’s founding, and Americans enjoyed protection by our states from outrageous interest rates — until the big banks’ lawyers found this loophole.

It’s time for Congress to restore to the fifty states the power to protect their people. Joined by Senators Jeff Merkley (D-OR), Dick Durbin (D-IL), Bernie Sanders (I-VT), and Carl Levin (D-MI), I filed an amendment to the Wall Street reform bill, which has been endorsed by the AARP and dozens of consumer groups including the Consumer Federation of America, Consumer Action, the Consumers Union, and the National Consumer Law Center (on behalf of their low-income clients). These groups are on the front lines of consumer protection and know the frustrations of fighting against out-of-state credit card companies that have unilateral discretion to raise rates, often for any or no reason.

Bolstering our system of federalism and restoring states’ rights to protect their citizens is a method that should have broad bipartisan appeal, and I encourage my Senate colleagues to give it serious consideration. What a blessing it would be to everyone if tricks and traps in the fine print of credit card contracts could no longer pitch Americans into the quicksand of 30% and higher interest rates. Let’s not pass up this opportunity to protect millions of Americans from inexcusable lending practices.

By: Senator Sheldon Whitehouse