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Yves Smith: Today’s update comes from Lynn Parramore of New Deal 2.0:

17 May

This piece is interesting as it shows how the protection of consumers against usury came to be undermined and how the first response actually came from the Pentagon who saw detrimental results impacting young recruits who became victims of payday loan sharks who strategically plonked themselves down just outside of major domestic military installments.
Make note of the names of the elected officials backing this new attempt to curb the bigboys and make sure if your elected officials aren’t on the list that you don’t give them the chance to stay in office is they are up for re-election this year. Just a thought. Also interesting that there are a lot of the ‘new kids on the block’ signed on to this proposed legislation.

Parramore: Big Bank Usury – Elizabeth Warren on Whitehouse Amendment

from naked capitalism by Yves Smith

Yves here. We’ve tended to focus on unsavory practices on the institutional end of the financial services market because they played a major role in the financial crisis, yet have not gotten the media coverage they merit. But some questionable conduct on the retail end only gets intermittent attention, even though it is also a significant activity. Since the 1980s, financial services firms have increasingly shifted their business models to one where profits depend on charging high interest rates and fees to a small portion of their customers. And the charges are sufficiently large that these customer often wind up on a debt treadmill.

To give a sanity check: back in 2007, the Pentagon tried stepping in as a financial regulator of sorts to restrict practices it saw as predatory:

The rule will limit how much lenders can charge military personnel, and it could affect banks, credit unions, mortgage providers and payday lenders, among others.

The Pentagon is especially concerned about payday loans, which are typically two-week extensions of credit to cover quick cash needs between paychecks. They can have interest rates of 300 percent a year or more, pushing troops so deep into debt that they cannot focus on fighting.

Defense officials and some lawmakers argue that young, financially unsophisticated service members are particularly vulnerable to shady financial practices and deep debt, especially when lenders offering high rates and quick cash set up shop outside the gates of military bases.

The push against payday loans is part of a bigger effort to clamp down on financial practices the Pentagon sees as predatory. It follows efforts to boost standards for insurance sales after reports found the insurance industry had spent years offering unsuitable and expensive products to soldiers.

The limit on loan rates would be set at 36 percent — a number meant to drive the payday loan industry out of military lending.

Today’s update comes from Lynn Parramore of New Deal 2.0:

Aristotle called usury the “most hated form” of wealth-accumulation. Dante sent practitioners to the seventh circle of hell. The Qur’an proposes that usurers are controlled by the devil’s influence, and we’ve all heard how Jesus, that avatar non-violence, was stirred to a round of ass-kicking when he found the money lenders in Herod’s temple.

Screwing the poor through usury has been considered an abomination throughout human civilization – a disease of the body politic that sickens people morally and economically.

For two centuries, American states had the power to enforce usury laws against any lender doing business with its citizens. But in 1978, a Supreme Court case transformed the world of lending. In Marquette National Bank of Minneapolis v. First of Omaha Service Corp., the Supreme Court changed the interpretation of the National Bank Act of 1863 so that states could no longer regulate interest rates on nationally-chartered banks. BINGO! Big banks quickly saw a Big Opportunity. They would now be able to dodge interest rate restrictions by reinventing themselves as “national banks” and hightailing it to states with weak consumer protections. A small number of states chucked interest rate caps in order to lure credit card business and related tax revenue.

Thanks to that unfortunate 1978 decision, credit card divisions of major banks are based in just a few states, while local banks struggle with unfair out-of-state competition fight to stay afloat. Meanwhile, consumers across the country are gouged by stratospheric interest rates and fees.

An amendment submitted by Senator Whitehouse and cosponsored by Senators Cochran, Merkley, Durbin, Sanders, Levin, Burris, Franken, Brown (OH), Menendez, Leahy, Webb, Casey, Wyden, Reed, Udall (CO), and Begich aims to change all this by restoring state powers to protect their citizens with interest rate limits on lending done within the state.

Here’s a breakdown of what the amendment would accomplish:

* Restore to the states the ability to enforce interest rate caps against out-of-state lenders.

* By Amending the Truth in Lending Act, cover all consumer lenders, no matter what their legal form, minimizing the opportunity for gaming by changing charter type.

* Become effective twelve months after enactment – giving state legislatures time to evaluate and update usury statutes.

* Level the playing field so that intrastate lenders like community banks, local retailers, and credit unions are no longer bound by stricter lending limits than national credit card companies.

TARP watchdog and New Deal 2.0 contributor Elizabeth Warren argues that “the loopholes that let big banks escape local laws need to be closed. She explains that there is “no good reason why large institutions should be able to headquarter in states with lax protection and then do business all over the country without following local laws. Smaller banks have to comply with tougher local rules, and the big banks should have to do the same. We need a level playing field between small, community banks and big, national banks.”

Memo to Big Banks: Get ready, boys. There’s a New Sheriff in town.

 

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