The Deregulation of Usury Ceilings, Rise of Easy Credit, and Increasing Consumer Debt

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THE DEREGULATION OF USURY CEILINGS, RISE OF EASYCREDIT, AND INCREASING CONSUMER DEBTST V N MER T NTEt

I. INTRODUCTIONFew laws regarding economic regulation have a longer history than usurylaws. 1 Strong attempts to limit usury punctuate Western history. Within the lastcentury, however, these attempts have quickly unraveled. A convergence offactors in the industrialized world has produced the groundbreaking phenomenon

of the credit card and its increasing and staggering impact, both positive andnegative, upon our nation s social, cultural, and economic life.2Ironically, the market for credit card loans did not explode because of anyspecific economic policy or market mechanism aimed at the credit card industry.Instead, the deregulation of usury caps, which occurred more than two decadesago, fueled the availability of easy credit. 3 Deregulation aimed at easing aninflationary crisis choking the nation s economic health in the form of laws that,in large part, had very little to do with the credit card industry. Thisderegulation, when combined with an important United States Supreme Courtdecision, paved the way for the credit card industry s unprecedented rise.4This rise has paralleled an explosion in the personal bankruptcy rate andconsumer debt in this country that has not been seen since the Great Depression. 5

Consequently, credit card debt had surged to 683 billion in the year 2000. 6 Bythe year 2005 Americans held seven hundred million credit cards, which wereused to buy 1.8 trillion in goods and services. 7 On a per household basis, thisamounted to fourteen credit cards used to make fourteen thousand dollars inpurchases, representing one-third of median household income. Along with thismassive rise in credit card use and the corresponding debt load comes the

t The author is an attorney in the State of Michigan specializing in corporate and probate law. J.D.,Michigan State University College of Law; B.A., University of Michigan, The author wishes to thankhis wife Denise and friend Alex Kanous, Esq., for their invaluable insights and assistance.

1. Christopher L. Peterson, Truth Understanding and High-Cost Consumer Credit: hHistoricalContexto the Truth in LendingAct 55 FLA. L. REV. 807, 808 (2003).2. Tom Brown Lacey Plache, Paying with Plastic: Maybe Not So Crazy 73 U. CHI. L. REV.

63, 63.(2006).3. Lawrence M. Ausubel, he Failureo Competition in the CreditCard Market 81 AM. ECON.

REV. 50, 56-64 1991) [hereinafter Ausubel I].4. Peterson, supra note 1, at 812.5. Vikas Bajaj Julie Creswell, Mortgages Give Wall St. New Worries N.Y. TIMES, June 19,

2007, at C 1.6. U.S. CENSUS BUREAU, STATISTICAL ABSTRACT OF THE UNITED STATES, 25, at 1165 (2002),

http://www.census.gov/prod/2003pubs/02statab/banking.pdf.7. David R. Francis, Congress Nips at Heels o Credit-Card Companies CHRISTIAN SCI.MONITOR, June 4, 2007, at 17-18, available at http://www.csmonitor.com/2007/0604/pl7s02-

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startling rise in personal bankruptcies, with 1.3 million filed in 1997 alone. 8Meanwhile, pre-tax profits for the banking credit card industry soared to 37.5billion last year, up almost ten billion dollars since 2 2These developments have spawned a renewed interest in examining thereasons behind the rise of consumer debt in America. In light of the recent andspectacular rise of foreclosures in America related to predatory lending, thisarticle serves as a timely reminder of how easily credit availability can producedisastrous consequences for those it is purportedly meant to help the most. 10Additionally, the explosion in consumer debt raises a question regarding theoptions that can best serve to reduce or even reverse the alarming growth in debtloads carried by the average American consumer.

This article will examine whether deregulated usury ceilings and the creditcard industry s consequent rise have played a symbiotic role in underminingAmerican citizens' financial health. In addition, it will explore Congress'srecent forays into addressing the issues associated with easy credit and whetherlegislation is needed to protect consumers facing increasing debt levels. Theremainder of this article will answer these questions in three parts.Part II will set the historical context for today s unprecedented creditavailability by examining traditional usury laws drafted to protect individualspurchasing homes, the dramatic rise in inflation and interest rates in the late1970s through the early 1980s, and the resultant waves of legislation designed toprotect banks and other lenders from going out of business.Part III will examine the effects produced by this legislation, exploring theunintended consequences arising from the changes in usury laws that havecreated the rise of the credit card industry. It will also analyze the positive andnegative effects stemming from the legislation and will explain why action isneeded in order to forestall a larger financial crisis than the one that is alreadyripping apart the sub-prime lending market in housing 1 and now spreading toWall Street. 12

This article will conclude in Parts IV and V by arguing for legislation toprotect consumers from predatory lending in the credit card industry in a mannerconsistent with this nation s moral, common law, and statutory legalunderpinnings while maintaining existing protections for banks involving themortgage markets.

8. 144 CONG. REC. E88 (daily ed. Feb. 4, 1998) (statement of Rep. George Gekas, Chair of theHouse Judiciary Subcommittee on Commercial and Administrative Law).

9. Margaret Price, Romancing the Credit CardHolder CHRISTIAN SCI MONITOR, June 18, 2007,at 13-14, availableat http://www.csmonitor.com/2007/0618/p 13s02-wmgn.html.

10. See Cracks in the Faqade ECONOMIST, Mar. 22, 2007, http://www.economist.com/finance/displayStory.cfmn?story-id=8885853. See also Ellen Florian Kratz, The Risk in Subprime FORTUNE,Mar. 1, 2007, http://money.cnn.com/2007/02/28/magazines/fortune/subprime.fortune/index.htm?postversion=2007030117; Chris Isidore, Subprime Woes: How Far How Wide FORTUNE, Mar. 52007, http://money.cnn.com/2007/03/05/news/economy/subprime/index.htm?postversion=2007030516.

11 See Cracks in the Facade supranote 10. See also Kratz, supra note 10; Isidore, supra note 10.12. Bajaj Creswell, supra note 5 at l

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II. HISTORY OF USURY LAWS AND THE CREDIT CARD S RISEUsury laws are among the oldest forms of economic and financialregulation in the Western World. Both the Greeks and Romans condemnedusury and drafted laws to defend against it. 3 Even the Bible took pains to pointout the dangers from usury in stating: Thou shalt not lend upon usury to thybrother; usury of money, usury of victuals, usury of anything that is lent uponusury. 14 Moses forbade the Jews from practicing usury within the Jewishcommunity. 5 Medieval Christians condemned usury or even taking interest onmoney, finding the practice immoral. 16 Anti-Semites even used usury as a coverfor their horrible discriminatory practices when expelling all Jews from Englandin 1290, blaming the Jews for blasphemously charging interest.17When English colonists arrived in America, the English common law camewith them to the New World. Consequently, long-standing nglish laws

regarding usury remained integral to America s early economic life.1 8 After theAmerican Revolution, a central political theme running through the new nationfeatured a hearty distrust for any concentration of power, particularly in thebanks, which were especially distrusted by our founding fathers. 19 By 1886, theUnited States stood as a nation built upon strong usury laws, with each statehaving its own regulations. Despite this apparent national and culturalconsensus on usury, however, real and practical problems developed thatrequired states to create exceptions to the laws. Within decades, usury lawsvastly varied from state to state.2 1At the same time, in 1887, the phrase credit card appeared to describe the

new, still largely theoretical, means of paying for goods and services. Eventhough people had been buying items on credit through the bartering for goodsor services since the late nineteenth century, the concept of using a card to payfor services was a new phenomenon. 22 Coined by Edward Bellamy in hisfictional book Looking Backward the term was intended to describe replacingcash with other means. 23 By the early twentieth century, a primitive form ofcredit card became a reality, and businesses began accepting these plasticcards. 24 Department stores such as Sears Roebuck & Company proved

13. Peterson, supra note 1 at 823-24, 831-34.14. Deuteronomy23:19-20.15. Leviticus 25:35-37.16. James M. Ackerman, InterestRates and the Law: Historyo Usury 1981 ARIZ. ST. L.J. 61,

72-73 (1981).17. Francis, supra note 7, at 17-18.18. Ackerman, supra note 16, at 85.19. Peterson, supra note 1, at 843-46.20. Ackerman, supra note 16, at 85.21. Id at 108.22. Brown & Plache, supranote 2, at 67-68.23. Lawrence M. Ausubel, The Credit Card Industry: History by Lewis Mandell 30 J. ECON.

LITERATURE 1517, 1518 (1992) (book review) [hereinafter Ausubel II].24. U.S. GEN ACCOUNTING OFFICE REPORT GAO/GGD-94-23, U.S. CREDIT CARD:COMPETITIVE DEVELOPMENTS NEED TO BE CLOSELY MONITORED 10 (1994).

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instrumental in providing early credit cards, known at the time as merchant orretail cards, that allowed consumers to make purchases using store credit. 25These cards stood out for their uniqueness rather than their ubiquity. Themerchant's decision however, to insist that consumers holding these cards paytheir balances in full at each month's end, guaranteed that few people used thesecards even as they helped pave the way for the modem credit card.

The modem credit card developed in the United States following WorldWar II. Although the merchant cards used by Sears Roebuck and similarcompanies had existed for several decades by the early-1950s, it was non-retailcard providers that created the modem credit card. 26 The Diner's Club Card,appearing in 1949, led the way. 27 The Diner's Club Card's uniqueness stemmedfrom the card's universal purchasing power offered by a third party; unlikeearlier retailer-based cards, it was not just a card issued by one company forpurchases from only that company.28 The Diner's Club Card's successprompted competitors such as American Express. 29 Although these cards stillrequired full balance payment at each month's end, they marked a substantialevolution in the card's versatility and usability. 30 By the 1960s, banks enteredthe field, and VISA and MasterCard put true credit card systems in place. Thesecredit purchase systems expanded rapidly into the 1970s.31

Despite rapid expansion, the credit card industry was confronted withunderlying structural problems during the 1970s. In particular, usury laws poseda number of problems, the most important of which was the cost they incurredon business. Usury laws varied by state and limited the interest rates creditlenders could charge. While these limits were in place to protect the consumer,they also served to limit potential profits for the credit card providers. Inaddition, these individual state rates prevented the establishment of true nationallending policies and forced legal compliance with fifty different stateregulations, a costly endeavor. 32

As interest rates spiraled upward throughout the economic malaiseafflicting the 1970s, it became increasingly difficult for the credit card issuers torealize the profits they desired. Yet, credit lenders remained tied to state lawsregarding usury because national laws on banking preempted state laws andprovided the overall framework under which state banking laws operated. Thus,states worked within an artificial set of controls that did not necessarily fit localneeds; this created tremendous bureaucratic inefficiency because of distantfederal interference. In addition, the state laws lacked uniformity, causing

25 Peterson, supranote 1, at 864-65.26. Id.27. Id. at 865. See Brown Plache, supranote 2, at 6828. Peterson, supranote 1, at 865. See Brown Plache, supranote 2, at 68.29. Brown Plache, supra note 2, at 69.30 Id31 Id at 69-70. See Peterson, supra note 1, at 865.32. Lawrence M. Ausubel, Credit Card Defaults Credit Card Profits and Bankruptcy 71 AM.

BANKR. L.J. 249, 260 (1997) [hereinafter Ausubel III].

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lending costs to remain incredibly high for the lender forced to comply withindividualized state laws. 33 At the same time, national usury laws in a highinflation environment crippled the lending industry. 34 Credit card lenders had tolimit lending to low-risk borrowers. Consequently, many American consumerslacked access to credit cards and the available credit remained artificially low. 35In response to these problems, the credit card lenders turned to the federalcourts. In a series of rulings, the credit card industry eventually wound its waythrough the courts, reaching the United States Supreme Court in 1978. InMarquette NationalBank of Minneapolis v. FirstOmaha Service Corp. 36 theSupreme Court held that a usury ceiling at the issuing bank lender s locationapplied to all consumer loans, thus providing the credit card lenders theopportunity to locate their operations in states with the most favorable usuryrates. 37 Accordingly, states began competitively reducing individual usury ratesin order to maintain in-state lending institutions, a race that resulted in thederegulation of the lending market. 38 In particular, Delaware and South Dakotaled the way in raising usury ceilings. 39 By 1981, enormous lending institutionssuch as Citicorp had relocated many of their central operations to South Dakota,thus becoming early beneficiaries of this rapid deregulation. 40

Deregulation did not end with lowered usury ceilings and the lex loci ruleestablished by the Marquette Court.41 In 1996, the United States Supreme Courtheld that the National Bank Act of 1864 permitted charging fees to credit cardholders who were late in their monthly payment. 4 2 Furthermore, the Courtupheld the lex loci rule as applicable when the cardholder is in one state andthe issuer is in another, with the governing laws being those of the state wherethe issuer is located.43 The Court ruled that late payment fees constitutedinterest and, as a result, greatly expanded the original scope of the Marquettedecision.

These decisions produced wide-ranging and, in some instances,unanticipated effects. 44 The next section will examine the impact uponAmerican consumers caused by these rulings as well as subsequent changes inthe law regarding the deregulation of the credit card industry.

33. Id.at260-61.34. Id.35. Glenn B. Canner James T. Fergus, The Economic Effects of Proposed Ceilings on Credit

Card InterestRates 73 FED. RES. BULL. 1, 1-2 (Jan. 1987).36. 439 U.S. 299 (1978).37. Id. at 318-19.38. Ausubel III, supranote 32, at 261.39. d40. Patrick McGeehan, Soaring Interest is Compounding Credit Card Woes or Millions N.Y.

TIMES, Nov. 21, 2004, at l41. Ausubel I, supranote 3, at 52. See Marquette 439 U.S. at 310-12.42. Smiley v. Citibank (South Dakota), 517 U.S. 735, 739-40 (1996).43. Id. at 742-43.44. Ausubel III, supranote 32, at 262-63. See Peterson, supra note 1, at 874.

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III. THE GROWTH IN EASY CREDIT ANDWHAT IT HAS MEANT FOR AMERICABecause of the developments in the credit card industry during the last

thirty years, credit card lending has boomed in popularity. 45 This section willfirst examine the beneficial effects for the American consumer provided by therise in easy credit. It will then analyze the dark side of this boom in popularityand the potential negative effects for both the consumer and the lender.46In the past several decades, credit availability has expanded to include manyAmericans who were previously excluded from receiving loans because of theirrisky lending status. Lower costs for the credit industry and the de factodisappearance of usury laws, however, caused lenders profits to soar andallowed them to dram atically expand lending.4 8 Indeed, from 1970 to 2001, the

number of households with at least one credit card rose from sixteen percent toseventy-three percent. 49 By 2005, the average American family held five creditcards, and the average outstanding balance per credit card had increased tonearly eleven hundred dollars. 51 This ready access to credit accrued enormousbenefits to the consumer in terms of convenience and flexibility. In addition,competition between lenders created an array of new services and incentivesincluding cash back, frequent flyer miles, or points substituted as cash. Theseservices accrued with each credit card purchase providing even greater incentivefor consumers to use a particular lender s card. However, the primary benefit ofexpanded credit was the ability it gave to American consumers to buy or investin a manner previously unavailable to them.

52As noted above, the rapid expansion in credit availability over the priortwenty-five years has meant that low-income borrowers who were previouslyunable to secure any credit have acquired access to seemingly limitless credit.Included in these consumer ranks are the high-risk individuals who werepreviously denied any credit extensions.54 With profits and income rising,lenders no longer feared loaning to these individuals. 55 Though lenders chargehigher rates to these individuals in an attempt to offset any losses stemming from

45. See generally LINDA SHERRY, KEN MCELDOWNEY STEPHEN BROBECK, CONSUMER FED NOF AM., CARD ISSUERS HIKE FEES AND RATES TO BOLSTER PROFITS (Nov. 5, 1998) (noting changes inpricing strategies by card issuers); JACK GILLIS STEPHEN BROBECK, CONSUMER FED N OF AM.,CREDIT CARD DEBTS ESCALATE IN 1997 (Dec. 16, 1997) (noting a rise in debt levels).

46. Bajaj Creswell, supra note 5, at Cl.47. Brown Plache, supra note 2, at 74 .48. Id at 69-70.49. DAVID S. EVANS RICHARD SCHMALENSEE, PAYING WITH PLASTIC: THE DIGITALREVOLUTION IN BUYING AND BORROWING 88-89 (2d ed., MIT Press 2005).50. Francis, supra note 7, at 17-18.51. Id at 234.52. Brown Plache, supranote 2, at 73.53. Id at 73-74.54. See Kratz, supra note 10 (noting the increase in home loans to borrowers with blemished credithistory); Isidore, supra note 10 (noting increased problems caused by granting home loans to

homeowners and buyers without credit).55. See Price, supranote 9, at 13-14.

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defaults, the risks of these loans remains substantial. For example, sub-primelenders in the mortgage market are taking a beating that may not only wipe outthe tremendous profits earned during the past five years, 56 but may potentiallydrive the U.S. economy into recession.This situation of easy credit availability has led to two phenomenons

specifically regarding credit cards. First, credit card interest rates remainsignificantly higher than the prime-lending rates. 57 Initially, during the 1980s,high credit card interest rates went hand in hand with the high interest rates ofthe era. As the prevailing interest rates dropped, however, credit card interestrates remained steady. Over a twenty-year period, leading into the 1990s, theserates largely remained within a range of seventeen percent to nineteen percent,even as the rates for other consumer loans declined regularly. 5 8 For instance, in1992, while the average credit card interest rate remained around eighteenpercent, 59 the prime-lending rate had dropped to six percent. The commercialbanks derived tremendous profit from these rates with profit margins running atthree times the earnings derived from other banking practices. 60

Lawmakers in Congress attempted to deal with this incredible disparityseveral times in the late 1980s and early 1990s. In every instance, however,Congress backed away from proposals to bring credit card lending rates more inline with other consumer loans. Pressure from the banking industry played alarge role in Congress's inability to deal with the problem. In 2006 alone,federal parties and political candidates received twenty-five million dollars inpolitical donations from commercial banks. 6 1 Industry pressure was not the onlyproblem, as policymakers of the early 1990s were still haunted by the effect thatartificial caps had on interest rates and the economy just a decade before in ahigh inflationary environment. 62

Second, consumer borrowing has notably increased with the rise in easycredit. 63 Such an increase is not inherently troublesome. For instance,expansion in credit has neither affected the buying patterns of those alreadypossessing credit cards nor been problematic for those using credit cards simplybecause of their tremendous convenience as payment vehicles. 64 Indeed, manyof the latter individuals pay off their balances each month and incur no lastingdebt load from their credit card usage. Such middle and lower income credit

56. See Cracks in the Facade supra note 10; Kratz, supra note 10; Isidore, supranote 10.57. See generally Price, supranote 9 (noting that the average interest rate on credit cards is 14.53

and sometimes reaches as high as 32.24%).58. Glenn B. Canner Charles A. Luckett, Developments in the Pricingo Credit CardServices78 FED. RES. BULL. 652, 652, 658 (Sept. 1992).59. U.S. GEN. ACCOUNTING OFFICE, supra note 24, at 2, 3.60. Francis, supra note 7, at 17-18.61 Id. New York Senator Hillary Clinton received the largest slice from the commercial banks at

378,000. Id.62. See e.g. John R. Cranford, CreditCard Rate Cap: Flash in Pan 49 CONG. Q. WKLY. 3442

(1991).63. See SHERRY, MCELDOWNEY BROBECK, supranote 45; GILLIS BROBECK, supranote 45.64. CHARLES A. DOCTER, AM. BANKR. INST. IMPACT OF CREDIT CARD USE ON CONSUMER

BANKRUPTCIES, Feb. 2, 1998, http://68.72.75.l/abidata/online/oumaltext/98Ffeature.html.

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card users are the primary beneficiaries from the expansion in credit.The problems that do stem from increased consumer borrowing result fromthe psychological or behavioral phenomenon of credit card abuse rather than the

properuse exhibited by the two populations mentioned above. Abuse has arisenin part due to the massive resources expended by lenders on advertising thatencourages consumption without thought.6 5 Consumers are persuaded to take onincreasing debt load levels financed over time, many requiring little to no moneydown for months, if not even longer.6 6 Although discussions linking rationalityand markets are commonplace, there are seldom discussions concerning theencouragement of rational consumer behavior over an irrational focus onemotion and values that result in greater consumer spending and borrowing.

Perhaps the best example of the way the banking industry encourages theundereducated and uninformed target population to borrow irresponsibly isfound on the college campus. On college campuses around the country,thousands of students are simply given credit cards and encouraged to spendthemselves into debt, or even worse, to finance their education through creditcards with nineteen percent plus interest rates compounded with ever increasingfees.6 7 Many parents feel as if they have no choice but to bail out their children,who lack almost any understanding of the impact their irresponsible behavior hason their lives-a fact widely known and appreciated for its profit-makingpotential within the credit card lending industry. 8

Aggressive advertising and marketing techniques are not the only means bywhich lenders have fostered the increasing debt load burdening Americanconsumers. For instance, the lending industry actively shuns any attempt toeducate consumers as to how amortized loans actually work and how makingonly the minimal monthly payments leads to a dramatic increase in costs.Moreover, this same lending industry often exacerbates the problem byidentifying households carrying massive credit card balances as worthy of evenmore credit card offers and credit extensions. 69 Such behavior by lendinginstitutions seeking profit, regardless of the cost to society, borders onirresponsible. 70

Irrational buying and consuming in America is encouraged at levelsdwarfing those in other industrialized nations; credit cards exacerbate thisproblem by making consumer spending even more convenient and seeminglyeasy.7 1 By 1998, the average credit card debt load per U.S. household hadreached five thousand dollars, with credit card debt representing the primary

65. SHERRY, MCELDOWNEY BROBECK, supranote 45; GILLIS BROBECK, supranote 45.66. DOCTER, supranote 64.67. See Marilyn Gardner, The Young and the Indebted CHRISTIAN SCI MONITOR, Mar. 31, 1994,http://www cs monitor com/1994/0331/31131 tml68. Id.69. Elizabeth Warren, The Bankruptcy Crisis 73 IND. L.J. 1079, 1083, 1099 (1998).70. Id.71. JULIET B. SCHOR, THE OVERWORKED AMERICAN: THE UNEXPECTED DECLINE OF LEISURE

107 1991).

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form of unsecured consumer debt within these households. 72 The amount ofdebt grows even higher if one looks only at the eighty percent of households inthe United States with credit cards; in these households, the average debt rises tosix thousand dollars. 73 Even more troublesome than these numbers is the factthat they have occurred during an era that has become characterized by decliningpersonal income. Household incomes have declined even with most Americanhouseholds adding a second primary moneymaker through the large-scale entryof women into the workforce. In 2007, the average American household withdebt on at least one credit card carried a balance greater than nine thousanddollars. Meanwhile, median household income has stagnated at forty-sixthousand dollars per year since the turn of the century. 74 At the same time, asincomes stagnate and employers cut pensions and other benefits, lenderscontinue to encourage borrowing. 75

During the past several years, these inflated consumer debt loads haveincreasingly relevant implications not only for the defaulting debtor but also forsociety as a whole. 7 6 Indeed, it has exacerbated the exorbitant rise in personalbankruptcies, 77 which produce damaging effects not limited to the individualdebtor. In fact, some reports allege that in 1998 the costs from bankruptciesequaled four hundred dollars for every household in the United States. Thesecosts are borne by society as individual creditors pass on their expenses toconsumers in the form of higher prices, fees, and rates. 78 Thus, Americancitizens are being asked to help subsidize the unregulated expansion in easycredit and the unremitting rise in profits for banking institutions.Even as consumer debt loads skyrocket, lender profits have sharplyincreased with the addition of new fees and other forms of profit-generatingmechanisms, even though credit card interest rates remain at incredibly highlevels compared to rates during the majority of this century. 79 One of the mostimportant profit-generating mechanisms for the credit card lenders has been thelow introductory rate, or teaser rate. Teaser rates are very low interest ratesthat last for a fixed time, typically several months, and then revert to the usualnear-twenty percent interest rate. Introductory rates attract consumers who oftencontinue to borrow at the high rates after the introductory period expires. Such

72. DAVID I LAMBSON ET AL., A DEBT PUZZLE IN KNOWLEDGE, INFORMATION, NEXPECTATIONS INMODERN MACROECONOMICS 228, 231 Philippe Aghion et al. eds., 2003).73. Id. at 228.74. Francis, supra note 7, at 17-18.75. See Warren, supranote 69, at app. at 1102-03. See also Kathleen A. Kost & Frank W. Munger,FoolingAll o the People Some o the Time: 1990 s Welfare Reform and the Exploitationo American

Values, 4 VA. J. SOC. POL'Y & L. 3, 4 (1996).76. See generally Cracks n the Facade, supranote 10; Kratz, supra note 10; Isidore, supra note

10.77. Ronald J. Mann, Global Credit Card Use and Debt: Policy Issues and Regulatory Responses52 Univ. of Tex. Sch. of Law, Law and Econ. Working Paper, Working Paper No. 49, 2005), availableat http:// www.utexas.edu/law/academics/centers/clbe/assets/CardsPolicySSRN.pdf.78. Donald L. Barlett & James B. Steele, Soaked by Congress, TIME, May 7, 2000.79. SHERRY, MCELDOWNEY & BROBECK, supranote 45; GILLIS & BROBECK, supranote 45. See

alsoPrice, supra note 9.

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rates highlight the poor correlation between these rates and the cost incurred bythe lending institution, as the institution s costs obviously do not simply triplewithin a few months to thereby justify the new rate. Hence, these rates stand assalient examples of profit-generating mechanisms that are increasingly deployedby an industry that is making massive amounts of money at consumer expensewhile wreaking damage on the larger American society. 80Another profit-generating mechanism increasingly deployed at consumerexpense is the profit from fees generated by monthly pa ents made after the

due date or credit usage over the allowed credit limit.8 Representing nearlyeight percent of revenues to credit card issuers, these fees are an important profitsource completely divorced from the expense incurred by the issuer. Byshortening the payment period of consumers who run late in making theirpayments, the credit card issuers are better able to maximize profitability fromthese fixed fees, averaging twenty-nine dollars per monthly payment missed.

82Finally, perhaps the most notorious profit-generating mechanism is the lowminimum monthly payment. As these payments have decreased in size, withpayments of fifty dollars or less on balances that can run into the thousands of

dollars, the profits generated by these payment schemes have skyrocketed. Morethan any other fee, low minimum monthly payments have come under increasingscrutiny, and there have even been calls for a requirement that credit card issuerswarn consumers about the amount of time it will take to pay their balances ifthey only make minimum payments. 83Mechanisms such as these have attracted newfound attention from experts

regarding the negative impact on society produced by consumers who makedecisions without the education or ability to completely understand what aminimum monthly payment plan really means regarding the product s finalcost. 84 Facially, such payments attractively lower up-front costs to theconsumer. However, they do so by stretching out payments and interestaccrued so that the advertised price of the product purchased is nowhere near theactual cost to the consumer making the purchase on credit.86 This encouragesspending at levels that might not occur if the consumer understood beforecompleting the transaction the true cost of purchasing the product or service. 87

Through these practices, credit card issuers are acting in a manner that is80. See David B. Gross Nicholas S. Souleles, Do Liquidity Constraintsand Interest RatesMatter or ConsumerBehavior? Evidence rom Credit CardData 117 Q. J. ECON. 149, 171-79 2002).See also Cracks in the Facade supranote 10; Kratz, supra note 10; Isidore, supranote 10.81. Smiley v. Citibank South Dakota), 517 U.S. 735, 737-38 1996).82. TAMARA DRAUT JAVIER SILVA, DEMOS, BORROWING TO MAKE ENDS MEET: THE GROWTH

OF CREDIT CARD DEBT IN THE 90S 35 (2003), available at http://www.demos-usa.org/pubs/borrowing-to.make-endsmeet.pdf.83. Teresa Dixon Murray, Small Payment Is a Big Problem StrugglingOut of Credit CardDebt

CHI. TRIB., June 11 2002, at B5.84. Id.85 Id.86. Id. See SHERRY McELDOWNEY BROBECK, supra note 45; GILLIS BROBECK, supra note45.87. Murray, supra note 83, at B5.

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inconsistent with precedent that provides consumer protection against suchpractices. Although such practices may currently be legal, the history of usurylaws indicates that there is a lack of statutory, common law, or moral precedentfor the current statutory framework supporting the present-day lending practicesof the credit card industry. 88 Overwhelming data illustrates that the negativeeffects produced by lending patterns within the credit card industry are growing.The renewed focus on practices usurious in nature has prompted a renewed callfor regulation of the lending institutions. 89

Recent attempts to regulate, however, have been met with strong oppositionfrom the credit card industry. The lobbying power enjoyed by the lendingindustry has stopped the federal government s elected members from acting onbehalf of their constituencies, and instead, Congress passed a bankruptcy bill thatprotects lenders at the consumer s expense. The bankruptcy bill, whichPresident Bush signed into law in April 2005, was passed in spite of 1.5 millionnew bankruptcies filed in 2004.90 The massive number of bankruptcies filed byAmerican consumers results from several causes, including the lendingindustry s current practices, as well as more traditional medical and personalemergencies having nothing to do with the credit card industry. The bankruptcybill forces individual debtors into Chapter 13 rather than Chapter 7 bankruptcy.Thus, instead of wiping out debts as Chapter 7 allows, debtors are forced into thestructured payments of Chapter 13.91 The bankruptcy bill wipes out manyprotections for those debtors who are struggling to restart their lives afterattempting to meet debt obligations. 92 In addition the law requires bankruptcyattorneys to certify the accuracy of their filings. This increases the cost and timeinherent in the bankruptcy process. 93

The 2005 bankruptcy bill represents a huge victory for the credit cardindustry at the expense of American consumers. Experts predict that credit cardcompanies will take advantage of the new law by more aggressively extendingcredit to high-risk consumers. This increased lending will occur regardless ofthe fact that history has already proven that people will almost always borrowmore if the money is made available to them, even if they do not have the meansto repay it. 94

The credit card industry has advanced several arguments in order to protectits incredibly profitable and advantageous position vis vis the Americancitizen. The primary argument is one of choice. Representatives from the creditcard industry argue that no one is coercing consumers to take on increasing

88. ee Ackerman, supranote 16 at 109-10.89. Mann, supra note 77, at 398.90. S OTT HORSLEY, PERSONAL BANKRUPTCIES RISE AHEAD OF NEW LAWS (NPR radiobroadcast May 6, 2005), available at http://www.npr.org/templates/story/story.php?storyID=4632946 last visited March 23, 2007).91. Mann, supranote 77, at 406.92. Id93. HORSLEY, supranote 90 .94. Id

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credit card debt.95 Further they complain about the costs inherent in offeringcredit services and the bankruptcies that cost the credit card industry millions ofdollars each year.96The choice argument draws its strength from free-market theory and

dominates the credit industry s position whenever its hegemony is even remotelychallenged. The credit card industry speaks of capitalism, competition, and therule of the marketplace as not only being determinative in setting interest rates,but as also acting as a natural brake on any practices resembling usury s return.The credit card industry s arguments advance the idea that regulations andgovernment-imposed controls will stifle the market and create more problemsthan they will solve. 97However, for multiple reasons, these arguments by the credit card industryhave not borne out. Congress and former presidents have recognized this

problem in their attempts to reign in the credit card issuing industry. In addition,the irrationality underlying consumer behavior conflicts with economic theoriespredicated on actions made by rational actors. 9 8 Economic experts haveincreasingly realized that irrational consumer behavior invalidates rationaleconomic models that are often used to explain market forces and strategiesbenefiting specialized interest groups over society as a whole. 99

These psychological and societal factors driving human behavior, crasslyand effectively exploited by consumer culture and mass-media advertising, needto be addressed in re-establishing consumer protections in today s deregulatedcredit card marketplace.' 00 It is this re-establishment of centuries of precedentregarding protections against usury that offers solutions toward dealing with theproblems brought on by virtually unrestrained extensions of credit to today'sAmerican consumer.

IV. POTENTIAL SOLUTIONSWith increasing amounts of consumer debt and millions of personal

bankruptcies per year, it is time for Congress to step in and establish protectionsfor the American consumer regarding the credit card industry.' 01 Abusivelending practices that would appear more appropriately in an episode of TheSopranos than in proper business practice need to be reined in soon.It is unlikely that a return to full regulation will occur soon, but such a

95. See Murray, supra note 83, at B5; Mann, supra note 77, at 398.96. Hillary Rule Credit CardInterest Rates and Their Immunity to Market Fluctuations 7 ANN.REV. BANKING L. 463 472-73 (1988).97. Mark Barry Riley, Note, Usury Legislation: Its Effects on the Economy and a Proposal or

Reform 33 VAND L. REV. 199,212-14 (1980).98. Mann, supra note 77, at 399. See Ausubel I supra note 3, at 64-65.99. he Human Factor ECONOMIST, Dec. 24 1994.

100. Id.101. Editorial, Housing and Hedge Funds N.Y. TIMES, June 28 2007,http://www.nytimes.com/2007/06/28/opinion/28thul .html.

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return would be undesirable no matter who is in power. Instead, modest changescan produce significant results. Among these modest changes are those arisingfrom the slight pressure Congress has begun to exert on the credit card industry.House and Senate hearings that were held early in 2007 on abusive lendingpractices may have played a role in Citigroup s recent decision to end theonerous practice known as universal default. 102 Universal default has beenused to increase profits by taking advantage of consumers who get into troublewith other lenders. Citigroup used universal default to raise interest rates oncards held by consumers through Citigroup when these same consumers eithermissed or made late payments on other debts held by other lenders. 103

Congress has further increased the pressure on lending institutions in arecent bill introduced by Senator Claire McCaskill (D) of Missouri and SenatorCarl Levin (D) of Michigan. 104 This bill proposes ten changes to helpconsumers struggling under mounting debt. These changes include no intereston debt that is paid on time, limits on penalty interest, no interest on fees,restrictions on over-limit fees, and prompt and fair crediting of cardholderpayments. 105 In addition to new restrictions, current usage practices applyingexisting laws to other forms of consumer debt can also help provide consumerswith relief.

One of the simplest solutions is already paramount in one of the world'sgreatest success stories: the American housing market. Home ownership rates inthe United States remain strong, and although the collapse in the sub-primemarket has and will further increase the volatility in the real estate sector, anumber of laws and institutions protect the vitality inherent in our homeownership society. 106 One of the foremost laws protecting the homebuyer is theTruth in Lending Act. This Act contains a series of steps designed to make thehome-buying experience more transparent and provides for mandatorydisclosures and warnings to prospective buyers. 10 7 The key to the Act is the meaningful disclosure requirement and as amended, it already provides aframework for regulating the credit card industry. 1 8 Certain provisions of theAct can be interpreted as demanding an end to the practice of not fully revealingthe implications of paying only the monthly minimum on a credit card balance,but actual enforcement of those provisions remains problematic. 109 Nonetheless,102. Price, supra note 9, at 13-14.103. Francis, supra note 7, at 17-18.104. Id.105. Stop Unfair Practices in Credit Cards Act: Hearing on S. 395 Before the U.S. S. 10th Cong.1 (2007) (statement of Sen. Carl Levin), available at http://www.senate.gov/levin/

newsroom/release.cfm?id=274257.106. See Cracks in the Faqade supra note 10; Isidore, supra note 10.107. Peterson, supra note 1 t 881.108. ee 15 U.S.C. 1601 1693 (2000).109. 15 U.S.C. 16 01(a) (2000) stating,

The Congress finds that economic stabilization would be enhanced and the competition amongthe various financial institutions and other firms engaged in the extension of consumer creditwould be strengthened by the informed use of credit. he informed use of credit results rom anawareness of the cost thereof y consumers. It is the purpose of this subchapter to assure a

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on May 23, 2007, following a two and one-half year study, the Federal ReserveBoard recommended a series of changes to the truth in lending regulations thatwould force credit card companies to disclose interest rates and fees in clearer,easier-to-understand language under proposed new consumer-protection rulesthat could take effect by year end

11

Another solution is to regulate unsolicited advertising and extensions ofautomatic credit with low introductory teaser rates and other such gimmicksthat attract high-risk borrowers. This solution may run into constitutionalproblems regarding how the Supreme Court has previously interpreted the FirstAmendment in relation to statutes regulating advertising. 111 However, byworking within the appropriate boundaries established by the Court regardingthe restriction of conduct with harmful secondary effects, rather than regulatingthe content of speech, laissez faire lending practices may be addressed. Thestate's right to dictate reasonable time, place, and manner restrictions on conductrelated to speech is within the rights given to the state's police powers. 112Regulating commercial conduct is appropriate. For example, the state needs toprotect its youth from the secondary effects resulting from exposing teenagersand young adults to open and continuous credit card solicitations which oftenlead to odious debts and badly damaged financial histories impacting laterborrowing. The increasing hostility from consumers toward unsolicited emailand telephone offers regarding advertising and attempts by Congress to put anend to such practices augurs well for extending these practices to forcing creditcard issuers to achieve a minimum standard regarding their solicitations. In thisway, once an individual is in debt, there are some proactive solutions to help himavoid sinking further into debt on the devastating road to bankruptcy.Additionally, there needs to be a return to implementing usury ceilingsapplicable to credit card interest rates that average a near across-the-board rate oftwenty percent and above. These rates are significantly higher than the primelending rate and three times that of a home mortgage. The mortgage industryserves as the primary industry assisted by deregulating usury ceilings. Themassive profits earned by credit card issuers are evidence that today's high ratesare far above what is necessary to protect against the inevitable losses incurredby opening up the market to high-risk lenders.11 3 By specifically targeting usuryceilings in the credit card industry, one of the greatest unintended consequencesof loosening usury laws can be rectified without causing the greater economic

meaningful disclosure of credit terms so that the consumer will be able to compare more readilythe various credit terms available to him and avoid the uninformed use o credit and to protectthe consumer against inaccurate and unfair credit billing and credit card practices.

Id. (emphasis added).110. Kathleen Day, Fed Plans t Revise Credit Card Rules WASH. POST, May 24 2007 at D

available at http://www.washingtonpost.com/wp-dyn/content/article/2007/05/23/AR2007052301498.html.

111. Va. State Bd. of Pharmacy v. Va. Citizens Consumer Council, Inc., 425 U.S. 748 (1976).112. O'Brien v. United States, 391 U.S. 367 (1968).113. See Secret History o the Credit Card (PBS television broadcast Nov. 23, 2004), available at

http://www.pbs.org/wgbh/pages/frontline/shows/credit/.

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harm potentially created by laws of a varying and inconsistent nature that areapplied far too broadly.V. CONCLUSION

A return to limited usury protections would stand in line with legalprecedent and public policy going back to Biblical times regarding debtforgiveness and protection for individuals from being overwhelmed by imposeddebts owed to others. 4 Reestablishing usury protection for consumers can thenallow for an economic system more in line with legal concepts rooted in fairnessand justice building upon ancient legal concepts defining our society. 5 In sucha way one of the great unintended consequences from modern policymaking canbe rectified and gradually turn around a status quo that harms the Americanconsumer.

114. euteronomy 15:1.115. Ackerman supra note 16 at 85-99.

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Documents

The Deregulation of Usury Ceilings, Rise of Easy Credit, and Increasing Consumer Debt