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Usury
Starting this thread because I've pointed this out a few times and have realized most people don't actually know this.
Point of information: banks are not under any usury laws. That is, starting in 1980, there was NO LIMIT to how much a bank could charge you for a loan. As of 1996, any limit on credit card and other fees was also repealed. History below:
Usury statutes in the United States
Each U.S. state has its own statute which dictates how much interest can be charged before it is considered usurious or unlawful.
If a lender charges above the lawful interest rate, a court will not allow the lender to sue to recover the debt because the interest rate was illegal anyway. In some states (such as New York) such loans are voided ab initio.[44]
However, there are separate rules applied to most banks. The U.S. Supreme Court held unanimously in the 1978 Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. case that the National Banking Act of 1863 allowed nationally chartered banks to charge the legal rate of interest in their state regardless of the borrower's state of residence.[45] In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act. Among the Act's provisions, it exempted federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits. Combined with the Marquette decision that applied to National Banks, this effectively overrode all state and local usury laws.[46][47] The 1968 Truth in Lending Act does not regulate rates, except for some mortgages, but requires uniform or standardized disclosure of costs and charges.[48]
In the 1996 Smiley v. Citibank case, the Supreme Court further limited states' power to regulate credit card fees and extended the reach of the Marquette decision. The court held that the word "interest" used in the 1863 banking law included fees and, therefore, states could not regulate fees.[49]
Each U.S. state has its own statute which dictates how much interest can be charged before it is considered usurious or unlawful.
If a lender charges above the lawful interest rate, a court will not allow the lender to sue to recover the debt because the interest rate was illegal anyway. In some states (such as New York) such loans are voided ab initio.[44]
However, there are separate rules applied to most banks. The U.S. Supreme Court held unanimously in the 1978 Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. case that the National Banking Act of 1863 allowed nationally chartered banks to charge the legal rate of interest in their state regardless of the borrower's state of residence.[45] In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act. Among the Act's provisions, it exempted federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits. Combined with the Marquette decision that applied to National Banks, this effectively overrode all state and local usury laws.[46][47] The 1968 Truth in Lending Act does not regulate rates, except for some mortgages, but requires uniform or standardized disclosure of costs and charges.[48]
In the 1996 Smiley v. Citibank case, the Supreme Court further limited states' power to regulate credit card fees and extended the reach of the Marquette decision. The court held that the word "interest" used in the 1863 banking law included fees and, therefore, states could not regulate fees.[49]
This is the principal reason the FIRE (finance, insurance and real estate) part of the economy blew up post-1980. The profits you can make in this sector have been unlimited since this repeal.
The results of this are things like payday lending, where rates are measured in the hundreds. No lie. Once you get into the payday lending cycle, it's very hard to get out.
As Daily Kos pointed out a few years ago, this is an ancient, Biblical sin.
From a practical point of view, it holds back the recovery. Just ask Citi (yes, Citi, or at least its recently sacked CEO Vikram Pandit):
The most startling development for the anti-usury campaign is the endorsement from the CEO of Citigroup, Vikram Pandit. Like other leading banks, Citi has been kicking up its credit-card rates as high as 30 percent, even as Citi is kept afloat with billions from the taxpayers. Nonetheless, Pandit told editorial writers at the Boston Globe he would support a legal ceiling on interest rates if it is applied industry-wide. "We're completely in support of having a rational rate structure." Pandit said.
The Citigroup executive did not endorse a specific ceiling, but cited the example of the 10 percent credit cards his bank introduced several years ago, believing other banks would follow and lower their rates too (when they didn't, Citi lost money in the venture). The Globe's exchange with Pandit was most likely inspired by news stories about the anti-usury actions in Boston.
Pandit made the telling observation that sky-high interest rates are among the impediments to ending the recession. If interest rates are curbed, he explained, banks would likely defend profitability by reducing the available credit and some high-risk borrowers would doubtless be cut off (the banking industry is already pursuing this strategy). However, Pandit added, a dramatic reduction in rates would help deeply indebted families recover their purchasing power. "I don't disagree," he said, "with the notion that having high rates in this environment is not conducive to driving economic recovery."
The Citigroup executive did not endorse a specific ceiling, but cited the example of the 10 percent credit cards his bank introduced several years ago, believing other banks would follow and lower their rates too (when they didn't, Citi lost money in the venture). The Globe's exchange with Pandit was most likely inspired by news stories about the anti-usury actions in Boston.
Pandit made the telling observation that sky-high interest rates are among the impediments to ending the recession. If interest rates are curbed, he explained, banks would likely defend profitability by reducing the available credit and some high-risk borrowers would doubtless be cut off (the banking industry is already pursuing this strategy). However, Pandit added, a dramatic reduction in rates would help deeply indebted families recover their purchasing power. "I don't disagree," he said, "with the notion that having high rates in this environment is not conducive to driving economic recovery."
Want to rein in the banks and get a recovery going that's for real? Get some new usury limits in place.
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