The deregulation of usury ceilings, rise of easy credit, and increasing consumer debt.

• Author: Mercatante, Steven

1. INTRODUCTION

   Few laws regarding economic regulation have a longer history than usury laws. (1) Strong attempts to limit usury punctuate Western history. Within the last century, however, these attempts have quickly unraveled. A convergence of factors in the industrialized world has produced the groundbreaking phenomenon of the credit card and its increasing and staggering impact, both positive and negative, upon our nation's social, cultural, and economic life. (2)

   Ironically, the market for credit card loans did not explode because of any specific economic policy or market mechanism aimed at the credit card industry. Instead, the deregulation of usury caps, which occurred more than two decades ago, fueled the availability of easy credit. (3) Deregulation aimed at easing an inflationary 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. This deregulation, when combined with an important United States Supreme Court decision, paved the way for the credit card industry's unprecedented rise. (4)

   This rise has paralleled an explosion in the personal bankruptcy rate and consumer 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) By the year 2005, Americans held seven hundred million credit cards, which were used to buy $1.8 trillion in goods and services. (7) On a per household basis, this amounted to fourteen credit cards used to make fourteen thousand dollars in purchases, representing one-third of median household income. Along with this massive rise in credit card use and the corresponding debt load comes the startling rise in personal bankruptcies, with 1.3 million filed in 1997 alone. (8) Meanwhile, pre-tax profits for the banking credit card industry soared to $37.5 billion last year, up almost ten billion dollars since 2002. (9)

   These developments have spawned a renewed interest in examining the reasons behind the rise of consumer debt in America. In light of the recent and spectacular rise of foreclosures in America related to predatory lending, this article serves as a timely reminder of how easily credit availability can produce disastrous consequences for those it is purportedly meant to help the most. (10) Additionally, the explosion in consumer debt raises a question regarding the options that can best serve to reduce or even reverse the alarming growth in debt loads carried by the average American consumer.

   This article will examine whether deregulated usury ceilings and the credit card industry's consequent rise have played a symbiotic role in undermining American citizens' financial health. In addition, it will explore Congress's recent forays into addressing the issues associated with easy credit and whether legislation is needed to protect consumers facing increasing debt levels. The remainder of this article will answer these questions in three parts.

   Part II will set the historical context for today's unprecedented credit availability by examining traditional usury laws drafted to protect individuals purchasing homes, the dramatic rise in inflation and interest rates in the late 1970s through the early 1980s, and the resultant waves of legislation designed to protect banks and other lenders from going out of business.

   Part III will examine the effects produced by this legislation, exploring the unintended consequences arising from the changes in usury laws that have created the rise of the credit card industry. It will also analyze the positive and negative effects stemming from the legislation and will explain why action is needed in order to forestall a larger financial crisis than the one that is already ripping apart the sub-prime lending market in housing (11) and now spreading to Wall Street. (12)

   This article will conclude in Parts IV and V by arguing for legislation to protect consumers from predatory lending in the credit card industry in a manner consistent with this nation's moral, common law, and statutory legal underpinnings while maintaining existing protections for banks involving the mortgage markets.

2. HISTORY OF USURY LAWS AND THE CREDIT CARD'S RISE

   Usury laws are among the oldest forms of economic and financial regulation in the Western World. Both the Greeks and Romans condemned usury and drafted laws to defend against it. (13) Even the Bible took pains to point out the dangers from usury in stating: "Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of anything that is lent upon usury." (14) Moses forbade the Jews from practicing usury within the Jewish community. (15) Medieval Christians condemned usury or even taking interest on money, finding the practice immoral. (16) Anti-Semites even used usury as a cover for their horrible discriminatory practices when expelling all Jews from England in 1290, blaming the Jews for blasphemously charging interest. (17)

   When English colonists arrived in America, the English common law came with them to the New World. Consequently, long-standing English laws regarding usury remained integral to America's early economic life. (18) After the American Revolution, a central political theme running through the new nation featured a hearty distrust for any concentration of power, particularly in the banks, which were especially distrusted by our founding fathers. (19) By 1886, the United States stood as a nation built upon strong usury laws, with each state having its own regulations. (20) Despite this apparent national and cultural consensus on usury, however, real and practical problems developed that required states to create exceptions to the laws. Within decades, usury laws vastly varied from state to state. (21)

   At the same time, in 1887, the phrase "credit card" appeared to describe the new, still largely theoretical, means of paying for goods and services. Even though people had been buying items on credit through the bartering for goods or services since the late nineteenth century, the concept of using a card to pay for services was a new phenomenon. (22) Coined by Edward Bellamy in his fictional book Looking Backward, the term was intended to describe replacing cash with other means. (23) By the early twentieth century, a primitive form of credit card became a reality, and businesses began accepting these plastic cards. (24) Department stores such as Sears Roebuck & Company proved instrumental in providing early "credit cards," known at the time as "merchant or retail cards," that allowed consumers to make purchases using store credit. (25) These cards stood out for their uniqueness rather than their ubiquity. The merchant's decision however, to insist that consumers holding these cards pay their balances in full at each month's end, guaranteed that few people used these cards even as they helped pave the way for the modern credit card.

   The modern credit card developed in the United States following World War II. Although the "merchant" cards used by Sears & Roebuck and similar companies had existed for several decades by the early-1950s, it was non-retail card providers that created the modern credit card. (26) The "Diner's Club Card," appearing in 1949, led the way. (27) The Diner's Club Card's uniqueness stemmed from the card's universal purchasing power offered by a third party; unlike earlier retailer-based cards, it was not just a card issued by one company for purchases from only that company. (28) The Diner's Club Card's success prompted competitors such as American Express. (29) Although these cards still required full balance payment at each month's end, they marked a substantial evolution in the card's versatility and usability. (30) By the 1960s, banks entered the field, and VISA and MasterCard put true credit card systems in place. These credit purchase systems expanded rapidly into the 1970s. (31)

   Despite rapid expansion, the credit card industry was confronted with underlying structural problems during the 1970s. In particular, usury laws posed a number of problems, the most important of which was the cost they incurred on business. Usury laws varied by state and limited the interest rates credit lenders could charge. While these limits were in place to protect the consumer, they also served to limit potential profits for the credit card providers. In addition, these individual state rates prevented the establishment of true national lending policies and forced legal compliance with fifty different state regulations, a costly endeavor. (32)

   As interest rates spiraled upward throughout the economic malaise afflicting the 1970s, it became increasingly difficult for the credit card issuers to realize the profits they desired. Yet, credit lenders remained tied to state laws regarding usury because national laws on banking preempted state laws and provided the overall framework under which state banking laws operated. Thus, states worked within an artificial set of controls that did not necessarily fit local needs; this created tremendous bureaucratic inefficiency because of distant federal interference. In addition, the state laws lacked uniformity, causing lending costs to remain incredibly high for the lender forced to comply with individualized state laws. (33) At the same time, national usury laws in a high inflation environment crippled the lending industry. (34) Credit card lenders had to limit lending to low-risk borrowers. Consequently, many American consumers lacked access to credit cards and the available credit remained artificially low. (35)

   In response to these problems, the credit card lenders turned to the federal courts. In a series of rulings, the credit card industry eventually wound its way through the courts, reaching the United States Supreme Court in 1978. In Marquette National Bank of Minneapolis v. First Omaha Service Corp., (36) the Supreme Court held...