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Monday, November 14, 2005

Legal Usury

ARGGHH. A lot of those people paying 30% on their credit cards are doing so because national banks are exempted from state usury laws other than those of their home state. Now the FDIC has submitted a proposed rule that would give state-chartered banks the same rights. Here it is - read it and weep:
In December 2004, the Financial Services Roundtable submitted a petition asking the FDIC to adopt rules that would provide parity between state banks and national banks in all interstate operations and activities. Specifically, the Roundtable asked that the rules provide that a state bank may operate interstate under the law and regulations of the bank's home state (i.e., its chartering state) to the same extent that a national bank operates interstate under the National Bank Act (NBA) and the OCC's rules. The Roundtable also requested that the rules implement section 27 of the FDI Act in such a way as to parallel the rules issued by the OCC and the OTS regarding preemption of state usury laws for national banks and federal thrifts operating interstate.

In response to that petition, the FDIC Board of Directors approved the attached notice of proposed rulemaking at its October 6, 2005, meeting. The proposed rules would implement section 24(j) of the FDI Act, 12 U.S.C. § 1831a(j), which describes, generally, which state laws apply to branches of out-of-state, state-chartered banks and would also implement section 27 of the FDI Act, 12 U.S.C. § 1831d, which generally describes the interest rates that state banks may charge.
This was probably inevitable, but it is not a good thing for debtors. It's inevitable because the FDIC fears losing many of its chartered banks. It's a bad thing for debtors because it will cut down the choices of bank available to them (you'll see even more consolidation in small banks), and there will be just as little restriction on the state-chartered banks as the national banks.

Back in 1978 the Supreme Court ruled that national banks were truly national, and governed only by the rules of their home state. This caused banks (especially credit-card issuers) to set up shop in states which had no effective limits, which forced states to compete for jobs and tax revenue by failing to institute or repealing such laws.

For a pretty simple explanation, see this article on BankRates.com:
There are 26 states that have no limit on what bank credit card issuers can charge for interest rates, according to the American Bankers Association. Issuers in 27 states have no limit on what they can charge for annual fees.

California, Delaware, South Dakota and Tennessee are among the states offering the least protection. These four states currently have no maximums on the following:

· delinquency fees
· cash advance fees
· over-the-limit fees
· transaction fees
· stop payment fees
· ATM fees
· mandatory grace period
Many community banks will now have a real incentive to sell out and become branches of banks chartered in such states. There are cards out there that will boot your rate up to something like 30% even if you have always paid on time, if your credit report shows that you are becoming a risk. So - take out a loan for college, make your payments perfectly, make your credit card payments perfectly - and you still can get a nice notice that your interest rate is now 25 or 30%. Not only that, but some banks now charge high fees just to make a payment on your credit card balance over the phone.

Honestly, half the politicians in Congress should be kicked right out of DC by a throng of outraged consumers. They are not doing their job. This is hurting the country and it needs to stop. At this point Congress should enact some limits, and should warn these companies that things will get worse if they don't stop gouging.

I said it earlier and I'll say it again. We are going to end up having to fix aproblem because we didn't deal with the important issues to begin with.

But this is not rocket science. I understand that some people will not be able to get credit without a high rate - but there have to be some limits.
So why not cap the rate, based on Prime?
You could.

And it would also be reasonable to have caps on late fees, etc. A $45 late fee on a $300 bill is ridiculous, especially when the cardholder sent the payment off in plenty of time. Also it costs them more to process a paper payment than to process an electronic payment, so they should be forbidden to charge for processing an electronic payment. They are only doing it to make money.

This situation has become outrageous.

PS: It's not personal. I owe no money on credit cards.
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