Usury laws offer diminishing
protection for credit cardholders
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
"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
"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)."
"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."
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
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.
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.
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
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.
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
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