May 18, 2010

Restore a historical safeguard

As the Senate completes debate on historic Wall Street reform legislation, it needs to address a problem that has caused severe stress for so many American families: runaway interest rates on credit cards.

Credit card companies now charge rates that, until recently, would have been illegal in most states. Rates of up to 30 percent are not uncommon. Yet states are powerless to stop the practice.

Currently pending before the Senate is a bipartisan amendment to the Wall Street reform bill that would restore to the 50 states the power to protect their citizens from unscrupulous out-of-state lenders.

It would make clear that the interest limits of the consumer’s state govern all interstate consumer lending transactions – including credit card lending. If this amendment is passed, each state could again enforce interest rate limits against lenders doing business with its citizens.

It was not always like this: For the first 202 years of our republic, each state had the ability to enforce usury laws against any lender charging excessive rates. Then, an apparently minor 1978 Supreme Court decision changed everything.

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 laws of the bank’s state.

It did not take long before big banks saw the loophole. They could avoid interest rate restrictions, they realized, by reorganizing as “national banks” and moving to states with the worst consumer protections.

Sure enough, the credit card divisions of most major Wall Street banks today are based in just a few states. Consumers in all other states are denied the protection against outrageous interest rates and fees that states historically provided their citizens.

This offends not just justice but history. Protecting citizens against excessive interest rates has been a hallmark of civilized legal codes for millenniums – through the founding of our republic. But then the big banks’ crafty lawyers found this inadvertent loophole.

The amendment has been endorsed by groups on the front lines of consumer protection, like AARP, Common Cause, the Consumer Federation of America, Consumer Action, Consumers Union and the National Consumer Law Center (on behalf of its low-income clients). These organizations know the frustrations of fighting out-of-state credit card companies that have unilateral discretion to raise rates – often for any, or even no, reason.

Bolstering our system of federalism and restoring states’ rights to protect their citizens should have broad bipartisan appeal.

I encourage my colleagues to support this amendment.

What a blessing it would be to everyone if the tricks and traps in the fine print of credit card contracts no longer pitched American families into the quicksand of 30 percent and higher interest rates.

Let’s not pass up this opportunity to restore states’ rights to protect millions of Americans from inexcusable lending practices.

By: Senator Sheldon Whitehouse