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Usury laws offer diminishing protection for credit cardholders

Usury laws offer little protection Allen Lohn of Rockland County, New York, pulled into a Citgo gas station last winter to fill up his tank. When he went to pay for the gas, there was a Citgo gas card application stand nearby that offered a $3 dollar rebate to those who filled out the form.

Lohn took a few minutes to complete the form and the clerk handed him his $3.

A few weeks later, he got the card along with an insert that listed the maximum interest rates credit card companies in each state can charge. New York's cap was the highest.

New York's laws may change
"I wondered why my state had the highest rate," said the retired accountant, who shot off an e-mail to his state representative. He learned via return mail that there is a bill in the works that would cap New York's interest rates at 15 percent. The state's banking board set the current maximum of 21 percent.

The laws that govern these lids are called usury laws. Usury is charging a price for credit that exceeds the limits set by law. But these laws offer less protection than most consumers realize.

"The reality for consumers is unless you get an Arkansas bank card which has managed to maintain its state laws [on fees], you just have to accept the fact that the interest rate and fees are not regulated and they could go up," said Gerri Detweiler, credit educator and author of the Ultimate Credit Handbook. "It's truly a buyer beware (situation)."

Few protections left
"There aren't many protections left for the consumer and it's frustrating for consumer advocates, who are trying to level the playing field," she added.

Some states don't have usury caps, and in those that do, federal law usually supersedes state law when it comes to setting rates and fees.

This trend began in the late 1980s. Most big banks packed up and moved their credit card operations to "debtor-friendly" states such as Delaware, said Steven Palmer, managing partner and a specialist in usury law at Palmer, Allen & McTaggart, a corporate law firm in Dallas.

The lure was "being able to charge higher fees," Palmer said. "When some of the banks left Texas, several of the credit card operations were spun off. Mercantile National Bank became Mcorp and they transferred to Wilmington, Delaware. That became Lotmus, which is now FirstUSA. As banks were failing, they moved so that they could be able to charge higher fees."

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No limit on rates in 26 states
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

Arkansas the most consumer-friendly
Currently, Arkansas has the most consumer-friendly laws for capping credit card rates and fees.

Each state's legislative body sets the restrictions on what banks can charge, according to the ABA.

"It's been a real problem for state legislators because what happens is that they try to institute a law that applies to businesses in their states and those companies will move out of the state to sideswipe the law but still send credit cards to people who live in that state" said Detweiler.

The action pending in New York state seeks to limit interest rates at 15 percent on all cards whether the issuer is based in New York or not.

Court decision paved the way
Credit card issuers scored a sweeping victory in 1978 when the Supreme Court ruled in Marquette vs. First Omaha Services that it was legal for nationally chartered banks to export more costly terms of their cards to states where the laws regarding interest rates restricted such practices.

The card issuer need only follow the law of the state in which its credit card operations are located.

At first, department store cards did not fall under the ruling. They varied interest rates according to the laws of the states where each cardholder lived. But in 1987, federal law changed. Now retailers can create special-purpose "credit-card" banks that can export credit card rates under the Marquette decision.

Retailers open special credit card banks
"A number of large card-issuing chains have opened up these special banks and are sending their high-priced cards into states where ceilings are lower," Detweiler wrote in her book, "a trend that is likely to continue."

The primary federal usury laws are contained in the National Bank Act (NBA) and the Depository Institutions Deregulation and Monetary Control Act of 1980.

"Back in the 1980s, when rates would go as high as 23 percent, there was a move in Congress to impose a usury law," said Philip Farley, manager of regulations assistance at the Federal Reserve Bank of Philadelphia, which regulates banks in Pennsylvania, a portion of Delaware and New Jersey. "But the lobbyists said it was counterproductive because if rates were too low, lenders would not allow for mortgages or credit cards,"

Usury caps a waste of time?
And some economists said usury caps were a waste of time because the Truth in Lending Act guaranteed that issuers would disclose rates, Farley said. They believed the required disclosures would direct consumers away from high charges.

As a result, there is no federal cap on rates. "The federal government only requires that whatever rates, fees or terms are set by issuers be disclosed to the consumer in accordance with the Truth in Lending Act," said Farley.

The cost of credit card debt is enormous. According to a Consumer Federation of America report released last December, credit card debt amounted to $452 billion. That total amounts to an average of $7,000 in debt for the estimated 55 million to 60 million households with credit cards.

With the exception of such states as Arkansas, New Hampshire, Ohio and New Mexico that are more cardholder-friendly, consumers have few choices.

Issuers won another round in a landmark 1992 case. Barbara Smiley, a Los Angeles credit card customer of Citibank's sued over a $15 late fee she was assessed. California law does not allow such charges, and she filed on behalf of all the state's Citibank credit customers who had been hit with late fees.

National banks levy charges nationwide
The Supreme Court had ruled in 1978 that a national bank could impose any credit rate allowed by the state in which it is located. In Smiley's case, the court ruled the term "interest" encompasses late-payment fees.

The Comptroller of the Currency, the federal official in charge of regulating banks, previously had ruled that such late-payment fees are valid anywhere Citibank customers reside, and the court ruled in the issuer's favor.

The California Supreme Court previously had reached the same conclusion.

Consumer advocates say it wouldn't hurt to find out where a bank's credit card operation is located. Though location is not the sole reason issuers increase fees, it may give some inkling about how high rates can go.

Meanwhile, Lohn doesn't use the Citgo card because there's a Mobil station nearby, but he does keep the card as a reminder of the impending state bill.

"My question was why would New York charge 21 percent but other states only charge 6 percent? What's the justification? It's good to know that there's a bill that would keep the interest rates from going higher than 15 percent."


-- Posted: Feb. 2, 1998

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