Runaway Credit Card Interest Rates
Floor Speech
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Mr. WHITEHOUSE. Madam President, I had actually planned to offer an amendment to the Wall Street reform bill this afternoon, but I have been informed that the open-amendment process does not begin until next week. I will describe my amendment this afternoon and then return to the floor at the earliest opportunity to actually call it up.
Before I describe it, I wish to commend Chairman Dodd and Chairman Lincoln for their hard work in crafting a strong Wall Street reform bill. The collapse of the housing market in 2008 and the resulting recession, near depression, was painful evidence that our financial institutions were underregulated and that we were ill-prepared for the invention of complex, new financial products.
The legislation we are currently debating will strengthen and modernize our Nation's financial regulation and substantially reduce the chances for future market bubbles and collapses, with all the economywide collateral damage we have seen from this collapse.
My amendment is cosponsored by Senator Merkley, who is on the Senate floor--I am delighted he is here with me--Senator Durbin, Senator Sanders, and Senator Levin. It would address an area that is not yet covered by the Wall Street reform bill, and that is runaway credit card interest rates.
This amendment would address that issue not by imposing any new restrictions on lending but, rather, by restoring to our States historic powers that they held for hundreds of years and that were eliminated only in the relatively recent past.
Madam President, when you and I were growing up, a credit card offer with a 20-percent or 30-percent interest rate might well have been a matter to bring to the police. Such interest rates were illegal under the laws of most, if not all, of the 50 States.
Today, in contrast, credit cards routinely charge rates of 30 percent or even more, usually after they have trapped people into a late payment or some trick of some kind to get them away from the teaser rate with which they sold them the credit card. They end up with 30 percent interest or higher. These interest rates have spiraled out of control, and for reasons I will explain, the States, at least recently, have been powerless to do anything about it despite the historic power they had in this area.
Prior to 1978--indeed, for the first 202 years of our Republic--each State had the ability to enforce usury laws against any lenders doing business with its citizens. Our economy grew and flourished during these two centuries. These were not hard periods for the financial services industries, and lenders profited while complying with the laws in effect where they operated.
Then in 1978 came an apparently uneventful Supreme Court case. It was little noticed at the time it was decided. In Marquette National Bank of Minneapolis v. First of Omaha Service Corporation, the Supreme Court interpreted one word--the word ``located''--in the National Bank Act of 1863. That word sat quietly in that statute for 102 years, but in 1978 they interpreted it as meaning the location of the business rather than the location of the customer--where the bank was headquartered or domiciled rather than where their customer lived.
Well, it did not take long before big banks cottoned on to the opportunity this created--an opportunity never sanctioned by Congress nor apparently even intended by the Supreme Court. It was an inadvertent loophole, but they found it, and they realized they could avoid the interest rate restrictions by reorganizing as national banks and moving to States that had the weakest consumer protections. So what happened? A race to the bottom. The proverbial race to the bottom took place as a small handful of States eliminated consumer protections, eliminated interest rate caps in order to attract into their States lucrative credit card business and their related tax revenue.
Today, there is a reason the credit card divisions of major banks are based in just a few States, and it causes consumers in all of our other States to be denied the historic protection they enjoyed from outrageous interest rates and fees. My amendment would reinstate the historic longstanding powers of our sovereign States to decide which interest rate limits, if any, should be set to protect their own citizens.
Let me be clear about what this amendment would not do. It would not prescribe or even recommend any interest rate caps and it would not impose any other lending limitations. It would restore to the States the power they enjoyed for over 200 years, from the very founding of the Republic--the power to say ``enough,'' the power to say 30 percent interest or 50 percent interest or 100 percent interest is too much and we won't allow you to charge it to our citizens.
The current system is not just unfair to consumers who can't be protected by their own State's government and are vulnerable to predatory lending in States far from their home, it is unfair to local lenders and retailers that continue to be bound by the laws of the home State. They are still bound. So the home State bank is under the State law. It is the huge, gigantic out-of-State national bank that can come in and compete against those small banks with that disadvantage. The small local bank has to play by the rules of fair interest rates, but the gigantic national credit card companies can avoid having any rules at all. So we need to level the playing field to eliminate this unfair and lucrative advantage that Wall Street banks enjoy against our local Main Street community banks.
To make sure lenders can't find another statute to use to once again avoid State law, my amendment would apply to all types of consumer lending institutions, not just national banks, and that is for the purpose of forbidding them and preventing them from changing their charters to avoid limitations on gouging consumers.
One of the other factors in this bill is that you can't choose your regulator by changing your charter, and we have reached broadly with this to protect against exactly that. My amendment would give State legislatures ample time to revise their usury statutes, if they feel they need revision, and would allow lenders the time to adjust. The amendment would not go into effect until 1 year after the President signs the bill into law.
In the meantime, it is worth noting that most States' usury laws are around or above 18 percent, and that federally regulated credit unions do quite well under a Federal 18-percent interest rate cap. So the underlying interest rates that States tend to apply, when this power has not been stripped from them, really inadvertently, tend to be quite reasonable, as proven by the fact that our credit union industry operates under a Federal 18-percent interest rate cap and does quite well.
It is the 30-percent and over interest rates that are the recent anomaly, the peculiarity in our country's history. We should go back to the historic norm--the way the Founding Fathers saw things under the doctrine of federalism--and close this modern bureaucratic loophole; probably an inadvertent loophole, but one that the big Wall Street banks found to gouge local citizens and compete unfairly with local banks.
I ask my colleagues for their consideration on this, and I turn to the distinguished Senator from Oregon, Senator Merkley.
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Mr. WHITEHOUSE. Madam President, I thank Senator Sanders and both my colleagues very much for their cosponsorship of this amendment and their advocacy of it. I would hope we could find support for this from the other side of the aisle.
I do not see this as an exclusively Democratic issue. If you look at the arguments that have been made by all of us on the floor just now for it--Senator Sanders spoke eloquently about the Judeo-Christian tradition that informs so much of our civilization and its horror of exaggerated exorbitant interest rates--for those of our colleagues who are attuned to those traditions, who take their religious principles seriously, they only have to harken back to sources of our Judeo-Christian tradition to find these kinds of limits are good and historic.
For those of us who are constitutional scholars and historians and are familiar with the doctrine of federalism and the role of the States in protecting their local citizens, the notion of States rights is one that has frankly been championed by colleagues on the other side of the aisle. Here is an opportunity to express their fealty to that doctrine and to that principle of States rights.
To those who think that 202 years of successful tradition of local regulation of interest rates has value, we can document that this is a recent anomaly. This is a peculiarity we are correcting. The great sweep of American history, over more than two centuries, is that the States protected their citizens properly and well. Anyone who cares for consumers in their States, local consumers up against huge credit card companies that keep you waiting on the phone for hours when you have to try to file a complaint, whose offices are in another State or in another country, sticking up for your local citizens is something I think we should all be prepared to agree to.
And finally, for those of us who have local banks, community banks, Main Street banks that are domiciled in our home States, why should they suffer the disadvantage of having to compete against these huge rapacious credit card companies and Wall Street banks and be subject to their State's law but have this loophole allow the monster banks, the gigantic banks to take advantage of consumers in this way?
I think you can look at this amendment from a whole variety of perspectives and the principles that it stands on are ones that many of our colleagues on the other side of the aisle have supported and championed over the years.
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Mr. WHITEHOUSE. Let me thank Senator Sanders, who is a passionate and articulate consumer advocate, and Senator Merkley of Oregon, who has come to the Senate in the interests of his native Oregonians, trying to make sure they are well served. He has been remarkable at that.
I apologize to Senator Durbin. I know he wanted to come and join us as well, but the timing changed and he was unable to attend. I thank him for his cosponsorship of this amendment. I also thank distinguished chairman of the Armed Services Committee, Chairman Levin, for cosponsoring it. I am truly honored by their support. The distinguished Senator from Illinois, Senator Burris, tells me he wishes to cosponsor as well. So I am grateful to him and I thank him. He is a former banker so he understands these issues very well, and he understands the effect of backing in the local community. I am very gratified by his support.
The last thing I want to say before I close on this subject is that the system by which credit card companies get consumers into these high-interest rate predicaments is no accident. It is a system and it has been carefully designed by the credit card companies, beginning with the way they write the agreement.
When credit cards began, the credit card agreement was two or three pages long. I am looking at an array of young pages here in front of me. They are pretty soon going to be getting credit cards of their own. They won't know what it was like when I got my first credit card. They are going to get a first credit card contract that has 20 pages of fine print. And hidden in the fine print have been amazing tricks and traps.
One of my personal favorites, which we thankfully ended under the leadership of Chairman Dodd earlier, was that the credit card companies would declare the day was over at 10 in the morning and then they would open the mail at 11. So if you got your payment in on the day it was due, they didn't open the mail until they declared the day was over.
The day wasn't over. The Sun was still up, morning was not even over, but they had declared in the fine print of the contract that they could end the payment day at 10 in the morning and then open the mail later that day so your check was, guess what, late, and that put you into a late payment category so they could jack your interest rate.
As Senator Sanders' constituent and so many folks in Rhode Island have experienced, 1 day you are at 12.9 percent and the next day you are at 30 percent and you don't know what hit you. And once they have you there, it is very hard to unwind. It is very hard to pay it off and get out. Many consumers cannot pay off their credit card all at once so now they are trapped, and they are trapped in what Prof. Ronald Mann of Columbia University has called ``the sweat box.''
He has looked at how the credit card companies manipulate their consumers, and what they do is they set up all these tricks and traps and suddenly you build up a nice balance and it is at a reasonable interest rate but you fall into one of the traps. They catch you with one of the tricks. And bang, they have you. You are now at a 30-percent interest rate, you don't have the resources to pay it off all at once, and the charges begin to pile up--the fees, the exorbitant interest--and pretty soon they have got you completely over a barrel.
It is systematized. It is done to extract the maximum amount of money and profit from consumers who are not aware of how sophisticated the machinery is that is out there trying to gouge them.
This is not just a question of exorbitant interest rates; it is also a question of pushing back against credit card companies that have developed a system, the sweat box system, that needs to be put to an end. And State regulation can help do it. Because if the State is not being paid off with tax revenues to look away from what the bank is doing, and if most of the damage is not being done in other States whose complaints are not as relevant in the home State, in the domicile State, then they get away with it.
They will not get away with it once federalism, States rights, and the American tradition of State protection of its citizens are restored and this inadvertent loophole is closed. My amendment would do that.
I hope colleagues who are listening to this will think about supporting the amendment. As I said, I think it ought to have bipartisan appeal and will certainly be good for people in our country who are at the business end of the credit card industry's machine.
I yield the floor.
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