THE DEREGULATION OF USURY CEILINGS, RISE OF EASY CREDIT, AND INCREASING CONSUMER DEBT

STEVEN MERCATANTEt

I. 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 4 rise. unprecedented industry's card credit the for way the paved decision, This rise has paralleled an explosion in the personal bankruptcy rate and 5 consumer debt in this country that has not been seen since the Great Depression. 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

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 thank his wife Denise and friend Alex Kanous, Esq., for their invaluable insights and assistance. 1. Christopher L. Peterson, Truth, Understanding, and High-Cost Consumer Credit: The HistoricalContext of the Truth in Lending Act, 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, The Failure of Competition in the Credit Card 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 of Credit-Card Companies, CHRISTIAN SCI. MONITOR, June 4, 2007, at 17-18, available at http://www.csmonitor.com/2007/0604/pl7s02wmgn.html.

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8 startling rise in personal bankruptcies, with 1.3 million filed in 1997 alone. 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 0 1 disastrous consequences for those it is purportedly meant to help the most. 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 1 and now spreading to 12 Wall Street. 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.

8. 144 CONG. REC. E88 (daily ed. Feb. 4, 1998) (statement of Rep. George Gekas, Chair of the House 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. 5, 2007, http://money.cnn.com/2007/03/05/news/economy/subprime/index.htm?postversion=2007030516. 11. See Cracks in the Facade,supra note 10. See also Kratz, supra note 10; Isidore, supra note 10. 12. Bajaj & Creswell, supra note 5, at Cl.

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II. 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 3 Even usury and drafted laws to defend against it. 1 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.1 8 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. 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 21 vastly varied from state to state. 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. 2 3 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
13. Peterson, supra note 1, at 823-24, 831-34. 14. Deuteronomy 23:19-20. 15. Leviticus 25:35-37. 16. James M. Ackerman, Interest Rates and the Law: A History of 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, supra note 2, at 67-68. 23. Lawrence M. Ausubel, The Credit Card Industry: A 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 or 25 retail cards," that allowed consumers to make purchases using store credit. 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 modem credit card. The modem 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 modem 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. 2 8 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 31 1970s. the into rapidly expanded systems purchase credit 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 forced32 legal compliance with fifty different state regulations, a costly endeavor. 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

25. 26. 27. 28. 29. 30. 31. 32. BANKR.

Peterson, supra note 1, at 864-65. Id. Id. at 865. See Brown & Plache, supra note 2, at 68. Peterson, supra note 1, at 865. See Brown & Plache, supra note 2, at 68. Brown & Plache, supra note 2, at 69. Id. Id. at 69-70. See Peterson, supra note 1, at 865. Lawrence M. Ausubel, Credit Card Defaults, Credit Card Profits, and Bankruptcy, 71 AM. L.J. 249, 260 (1997) [hereinafter Ausubel III].

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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 35 lacked access to credit cards and the available credit remained artificially low. 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 that a usury ceiling at the issuing bank lender's location applied to all consumer loans, thus providing the credit card lenders the opportunity to locate their operations in states with the most favorable usury rates. 3 7 Accordingly, states began competitively reducing individual usury rates in order to maintain in-state lending institutions, a race that resulted in the deregulation of the lending market. 38 In particular, Delaware and South Dakota led the way in raising usury ceilings. 39 By 1981, enormous lending institutions to South Dakota, such as Citicorp had relocated many of their central operations 40 thus becoming early beneficiaries of this rapid deregulation. Deregulation did not end with lowered usury ceilings and the "lex loci" rule established by the Marquette Court. 4 1 In 1996, the United States Supreme Court held that the National Bank Act of 1864 permitted charging fees to credit card holders who were late in their monthly payment. 4 2 Furthermore, the Court upheld the "lex loci" rule as applicable when the cardholder is in one state and the issuer is in another, with the governing laws being those of the state where the issuer is located.4 3 The Court ruled that late payment fees constituted interest and, as a result, greatly expanded the original scope of the Marquette decision. These decisions produced wide-ranging and, in some instances, unanticipated effects. 44 The next section will examine the impact upon American consumers caused by these rulings as well as subsequent changes in the 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, supra note 32, at 261. 39. Id. 40. Patrick McGeehan, Soaring Interest is Compounding Credit Card Woes for Millions, N.Y. TIMES, Nov. 21, 2004, at Al. 41. Ausubel I, supra note 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, supra note 32, at 262-63. See Peterson, supra note 1, at 874.

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III. THE GROWTH IN EASY CREDIT AND WHAT IT HAS MEANT FOR AMERICA Because of the developments in the credit card industry during the last thirty years, credit card lending has boomed in popularity. 4 5 This section will first examine the beneficial effects for the American consumer provided by the rise in easy credit. It will then analyze the dark side of this boom in popularity 46 and the potential negative effects for both the consumer and the lender. In the past several decades, credit availability has expanded to include many Americans who were previously excluded from receiving loans because of their risky lending status. Lower costs for the credit industry and the de facto disappearance of usury laws, however, caused lenders' profits to soar and allowed them to dramatically expand lending. 4 8 Indeed, from 1970 to 2001, the number of households with at least one credit card rose from sixteen percent to seventy-three percent. 49 By 2005, the average American family held five credit cards, and the average outstanding balance per credit card had increased to nearly eleven hundred dollars. 5 1 This ready access to credit accrued enormous benefits to the consumer in terms of convenience and flexibility. In addition, competition between lenders created an array of new services and incentives including cash back, frequent flyer miles, or points substituted as cash. These services accrued with each credit card purchase providing even greater incentive for consumers to use a particular lender's card. However, the primary benefit of expanded credit was the ability it gave to American consumers to buy or invest 52 them. to unavailable previously manner in a As noted above, the rapid expansion in credit availability over the prior twenty-five years has meant that low-income borrowers who were previously unable to secure any credit have acquired access to seemingly limitless credit. Included in these consumer ranks are the high-risk individuals who were previously denied any credit extensions. 54 With profits and income rising, lenders no longer feared loaning to these individuals. 55 Though lenders charge higher rates to these individuals in an attempt to offset any losses stemming from
45. See generally LINDA SHERRY, KEN MCELDOWNEY & STEPHEN BROBECK, CONSUMER FED'N OF AM., CARD ISSUERS HIKE FEES AND RATES TO BOLSTER PROFITS (Nov. 5, 1998) (noting changes in pricing 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 DIGITAL REVOLUTION 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, supra note 2, at 73. 53. Id. at 73-74. 54. See Kratz, supra note 10 (noting the increase in home loans to borrowers with blemished credit history); Isidore, supra note 10 (noting increased problems caused by granting home loans to homeowners and buyers without credit). 55. See Price, supra note 9, at 13-14.

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defaults, the risks of these loans remains substantial. For example, sub-prime lenders in the mortgage market are taking a beating that may not only wipe out the tremendous profits earned during the past five years, 56 but may potentially drive 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 remain significantly 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 of the era. As the prevailing interest rates dropped, however, credit card interest rates remained steady. Over a twenty-year period, leading into the 1990s, these rates 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, in 1992, while the average credit card interest rate remained around eighteen percent, 59 the prime-lending rate had dropped to six percent. The commercial running at banks derived tremendous profit from these rates with profit margins 60 three times the earnings derived from other banking practices. Lawmakers in Congress attempted to deal with this incredible disparity several times in the late 1980s and early 1990s. In every instance, however, Congress backed away from proposals to bring credit card lending rates more in line with other consumer loans. Pressure from the banking industry played a large role in Congress's inability to deal with the problem. In 2006 alone, federal parties and political candidates received twenty-five million dollars in political donations from commercial banks. 6 1 Industry pressure was not the only problem, as policymakers of the early 1990s were still haunted by the effect that rates and the economy just a decade before in a artificial caps had on interest 62 environment. inflationary high Second, consumer borrowing has notably increased with the rise in easy credit. 63 Such an increase is not inherently troublesome. For instance, expansion in credit has neither affected the buying patterns of those already possessing credit cards nor been problematic for those using credit cards simply because of their tremendous convenience as payment vehicles. 64 Indeed, many of the latter individuals pay off their balances each month and incur no lasting debt 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, supra note 10. 57. See generally Price, supra note 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 Pricingof Credit Card Services, 78 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, Credit Card Rate Cap: Flash in Pan, 49 CONG. Q. WKLY. 3442 (1991). 63. See SHERRY, MCELDOWNEY & BROBECK, supra note 45; GILLIS & BROBECK, supra note 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 from the psychological or behavioral phenomenon of credit card abuse rather than the properuse exhibited by the two populations mentioned above. Abuse has arisen in part due to the massive resources expended by lenders on advertising that encourages consumption without thought. 6 5 Consumers are persuaded to take on increasing debt load levels financed over time, many requiring little to no money down for months, if not even longer. 6 6 Although discussions linking rationality and markets are commonplace, there are seldom discussions concerning the encouragement of rational consumer behavior over an irrational focus on emotion and values that result in greater consumer spending and borrowing. Perhaps the best example of the way the banking industry encourages the undereducated and uninformed target population to borrow irresponsibly is found on the college campus. On college campuses around the country, thousands of students are simply given credit cards and encouraged to spend themselves into debt, or even worse, to finance their education through credit cards with nineteen percent plus interest rates compounded with ever increasing fees. 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 has on their lives-a fact widely known and appreciated for its profit-making potential within the credit card lending industry."8 Aggressive advertising and marketing techniques are not the only means by which lenders have fostered the increasing debt load burdening American consumers. For instance, the lending industry actively shuns any attempt to educate consumers as to how amortized loans actually work and how making only the minimal monthly payments leads to a dramatic increase in costs. Moreover, this same lending industry often exacerbates the problem by identifying households carrying massive credit card balances as worthy of even more credit card offers and credit extensions. 69 Such behavior by lending institutions seeking profit, regardless of the cost to society, borders on 70 irresponsible. Irrational buying and consuming in America is encouraged at levels dwarfing those in other industrialized nations; credit cards exacerbate this problem by making consumer spending even more convenient and seemingly easy.7 1 By 1998, the average credit card debt load per U.S. household had reached five thousand dollars, with credit card debt representing the primary

65. SHERRY, MCELDOWNEY & BROBECK, supra note 45; GILLIS & BROBECK, supra note 45. 66. DOCTER, supra note 64. 67. See Marilyn Gardner, The Young and the Indebted, CHRISTIAN SCI. MONITOR, Mar. 31, 1994, http://www.csmonitor.com/1994/0331/31131 .html. 68. 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 of debt grows even higher if one looks only at the eighty percent of households in the United States with credit cards; in these households, the average debt rises to six thousand dollars. 73 Even more troublesome than these numbers is the fact that they have occurred during an era that has become characterized by declining personal income. Household incomes have declined even with most American households adding a second primary moneymaker through the large-scale entry of women into the workforce. In 2007, the average American household with debt on at least one credit card carried a balance greater than nine thousand dollars. Meanwhile, median household income has stagnated at forty-six thousand dollars per year since the turn of the century. 74 At the same time, as incomes stagnate and employers cut pensions and other benefits, lenders 75 continue to encourage borrowing. During the past several years, these inflated consumer debt loads have increasingly relevant implications not only for the defaulting debtor but also for society as a whole. 7 6 Indeed, it has exacerbated the exorbitant rise in personal bankruptcies, 7 7 which produce damaging effects not limited to the individual debtor. In fact, some reports allege that in 1998 the costs from bankruptcies equaled four hundred dollars for every household in the United States. These costs are borne by society as individual creditors pass on their expenses to consumers in the form of higher prices, fees, and rates. 78 Thus, American citizens are being asked to help subsidize the unregulated expansion in easy credit and the unremitting rise in profits for banking institutions. Even as consumer debt loads skyrocket, lender profits have sharply increased with the addition of new fees and other forms of profit-generating mechanisms, even though credit card interest rates remain at incredibly high levels compared to rates during the majority of this century. 7 9 One of the most important profit-generating mechanisms for the credit card lenders has been the low introductory rate, or "teaser rate." Teaser rates are very low interest rates that last for a fixed time, typically several months, and then revert to the usual near-twenty percent interest rate. Introductory rates attract consumers who often continue to borrow at the high rates after the introductory period expires. Such
72. DAVID I. LAMBSON ET AL., A DEBT PUZZLE IN KNOWLEDGE, INFORMATION, AND EXPECTATIONS IN MODERN MACROECONOMICS 228, 231 (Philippe Aghion et al. eds., 2003). 73. Id. at 228. 74. Francis, supra note 7, at 17-18. 75. See Warren, supra note 69, at app. at 1102-03. See also Kathleen A. Kost & Frank W. Munger, Fooling All of the People Some of the Time: 1990's Welfare Reform and the Exploitation of American Values, 4 VA. J. SOC. POL'Y & L. 3, 4 (1996). 76. See generally Cracks in the Facade, supra note 10; Kratz, supra note 10; Isidore, supra note 10. 77. Ronald J. Mann, Global Credit Card Use and Debt: Policy Issues and Regulatory Responses 52 (Univ. of Tex. Sch. of Law, Law and Econ. Working Paper, Working Paper No. 49, 2005), available at 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, supra note 45; GILLIS & BROBECK, supra note 45. See also Price, supra note 9.

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rates highlight the poor correlation between these rates and the cost incurred by the lending institution, as the institution's costs obviously do not simply triple within a few months to thereby justify the new rate. Hence, these rates stand as salient examples of profit-generating mechanisms that are increasingly deployed by an industry that is making massive amounts of money at consumer expense 80 while wreaking damage on the larger American society. Another profit-generating mechanism increasingly deployed at consumer expense 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 nearly eight percent of revenues to credit card issuers, these fees are an important profit source completely divorced from the expense incurred by the issuer. By shortening the payment period of consumers who run late in making their payments, the credit card issuers are better able to maximize profitability from 82 these fixed fees, averaging twenty-nine dollars per monthly payment missed. Finally, perhaps the most notorious profit-generating mechanism is the low minimum monthly payment. As these payments have decreased in size, with payments of fifty dollars or less on balances that can run into the thousands of dollars, the profits generated by these payment schemes have skyrocketed. More than any other fee, low minimum monthly payments have come under increasing scrutiny, and there have even been calls for a requirement that credit card issuers warn consumers about the amount of time it will take to pay their balances if 83 they only make minimum payments. Mechanisms such as these have attracted newfound attention from experts regarding the negative impact on society produced by consumers who make decisions without the education or ability to completely understand what a minimum monthly payment plan really means regarding the product's final cost. 84 Facially, such payments attractively lower up-front costs to the consumer. However, they do so by stretching out payments and interest accrued so that the advertised price of the product purchased is nowhere near the actual cost to the consumer making the purchase on credit. 8 6 This encourages spending at levels that might not occur if the consumer understood before 87 completing the transaction the true cost of purchasing the product or service. Through these practices, credit card issuers are acting in a manner that is
80. See David B. Gross & Nicholas S. Souleles, Do Liquidity Constraints and Interest Rates Matterfor Consumer Behavior? Evidencefrom Credit CardData, 117 Q. J. ECON. 149, 171-79 (2002). See also Cracks in the Facade,supra note 10; Kratz, supra note 10; Isidore, supra note 10. 81. Smiley v. Citibank (South Dakota), 517 U.S. 735, 737-38 (1996).
OF 82. TAMARA DRAUT & JAVIER SILVA, DEMOS, BORROWING TO MAKE ENDS MEET: THE GROWTH 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: Struggling Out 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 note 45. 87. Murray, supra note 83, at B5.

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inconsistent with precedent that provides consumer protection against such practices. Although such practices may currently be legal, the history of usury laws indicates that there is a lack of statutory, common law, or moral precedent for the current statutory framework supporting the present-day lending practices of the credit card industry. 88 Overwhelming data illustrates that the negative effects produced by lending patterns within the credit card industry are growing. in nature has prompted a renewed call The renewed focus on practices usurious 89 institutions. lending the for regulation of Recent attempts to regulate, however, have been met with strong opposition from the credit card industry. The lobbying power enjoyed by the lending industry has stopped the federal government's elected members from acting on behalf of their constituencies, and instead, Congress passed a bankruptcy bill that The bankruptcy bill, which protects lenders at the consumer's expense. President Bush signed into law in April 2005, was passed in spite of 1.5 million new bankruptcies filed in 2004.90 The massive number of bankruptcies filed by American consumers results from several causes, including the lending industry's current practices, as well as more traditional medical and personal emergencies having nothing to do with the credit card industry. The bankruptcy bill 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 the structured payments of Chapter 13.91 The bankruptcy bill wipes out many protections for those debtors who are struggling to restart their lives after attempting to meet debt obligations. 92 In addition, the law requires bankruptcy their filings. This increases the cost and time attorneys to certify the accuracy of93 inherent in the bankruptcy process. The 2005 bankruptcy bill represents a huge victory for the credit card industry at the expense of American consumers. Experts predict that credit card companies will take advantage of the new law by more aggressively extending credit to high-risk consumers. This increased lending will occur regardless of the fact that history has already proven that people will almost always borrow is made available to them, even if they do not have the means more if the9 money 4 to repay it. The credit card industry has advanced several arguments in order to protect its incredibly profitable and advantageous position vis d vis the American citizen. The primary argument is one of choice. Representatives from the credit card industry argue that no one is coercing consumers to take on increasing

88. See Ackerman, supra note 16, at 109-10. 89. Mann, supra note 77, at 398. 90. SCOTT HORSLEY, PERSONAL BANKRUPTCIES RISE AHEAD OF NEW LAWS (NPR radio broadcast May 6, 2005), available at http://www.npr.org/templates/story/story.php?storyID=4632946 (last visited March 23, 2007).
91. Mann, supra note 77, at 406.

92.
93.

Id.
HORSLEY, supra note 90.

94. Id.

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credit card debt. 95 Further, they complain about the costs inherent in offering credit services and the bankruptcies that cost the credit card industry millions of 96 dollars each year. The choice argument draws its strength from free-market theory and dominates the credit industry's position whenever its hegemony is even remotely challenged. The credit card industry speaks of capitalism, competition, and the rule 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 and government-imposed97 controls will stifle the market and create more problems than they will solve. However, for multiple reasons, these arguments by the credit card industry have 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 theories predicated on actions made by rational actors. 9 8 Economic experts have increasingly realized that irrational consumer behavior invalidates rational economic models that are often used to explain market forces and strategies 99 benefiting specialized interest groups over society as a whole. These psychological and societal factors driving human behavior, crassly and effectively exploited by consumer culture and mass-media advertising, need to be addressed in re-establishing consumer protections in today's deregulated credit card marketplace.' 0 0 It is this re-establishment of centuries of precedent regarding protections against usury that offers solutions toward dealing with the problems brought on by virtually unrestrained extensions of credit to today's American consumer. IV. POTENTIAL SOLUTIONS With increasing amounts of consumer debt and millions of personal bankruptcies per year, it is time for Congress to step in and establish protections for the American consumer regarding the credit card industry.' 0 1 Abusive lending practices that would appear more appropriately in an episode of "The Sopranos" 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 Card Interest 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 for 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. The 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 changes can produce significant results. Among these modest changes are those arising from 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 lending practices may have played a role in Citigroup's recent decision to end the onerous practice known as "universal default." 102 Universal default has been used to increase profits by taking advantage of consumers who get into trouble with other lenders. Citigroup used universal default to raise interest rates on cards held by consumers through Citigroup when these same consumers either 103 missed or made late payments on other debts held by other lenders. Congress has further increased the pressure on lending institutions in a recent bill introduced by Senator Claire McCaskill (D) of Missouri and Senator Carl Levin (D) of Michigan. 104 This bill proposes ten changes to help consumers struggling under mounting debt. These changes include no interest on 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 cardholder payments. 105 In addition to new restrictions, current usage practices applying existing laws to other forms of consumer debt can also help provide consumers with relief. One of the simplest solutions is already paramount in one of the world's greatest success stories: the American housing market. Home ownership rates in the United States remain strong, and although the collapse in the sub-prime market has and will further increase the volatility in the real estate sector, a number of laws and institutions protect the vitality inherent in our home ownership society. 106 One of the foremost laws protecting the homebuyer is the Truth in Lending Act. This Act contains a series of steps designed to make the home-buying experience more transparent and provides for mandatory disclosures and warnings to prospective buyers. 10 7 The key to the Act is the "meaningful disclosure" requirement and as amended, it already provides a framework for regulating the credit card industry. 1 8 Certain provisions of the Act can be interpreted as demanding an end to the practice of not fully revealing the implications of paying only the monthly minimum on a credit card balance, but actual enforcement of those provisions remains problematic. 10 9 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. 1395 Before the U.S. S., 110th 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, at 881. 108. See 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 among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit. The informed use of credit resultsfrom an awareness of the cost thereof by 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 Reserve Board recommended a series of changes to the truth in lending regulations that would force credit card companies "to disclose interest rates and fees in clearer, easier-to-understand language under proposed new consumer-protection rules 110 ' ' year-end. by effect take that could Another solution is to regulate unsolicited advertising and extensions of automatic credit with low introductory "teaser" rates and other such gimmicks that attract high-risk borrowers. This solution may run into constitutional problems regarding how the Supreme Court has previously interpreted the First Amendment in relation to statutes regulating advertising. 1 11 However, by working within the appropriate boundaries established by the Court regarding the restriction of conduct with harmful secondary effects, rather than regulating the content of speech, laissez faire lending practices may be addressed. The state's right to dictate reasonable time, place, and manner restrictions on conduct 1 related to speech is within the rights given to the state's police powers. 12 Regulating commercial conduct is appropriate. For example, the state needs to protect its youth from the secondary effects resulting from exposing teenagers and young adults to open and continuous credit card solicitations which often lead to odious debts and badly damaged financial histories impacting later borrowing. The increasing hostility from consumers toward unsolicited email and telephone offers regarding advertising and attempts by Congress to put an end to such practices augurs well for extending these practices to forcing credit card issuers to achieve a minimum standard regarding their solicitations. In this way, once an individual is in debt, there are some proactive solutions to help him avoid sinking further into debt on the devastating road to bankruptcy. Additionally, there needs to be a return to implementing usury ceilings applicable to credit card interest rates that average a near across-the-board rate of twenty percent and above. These rates are significantly higher than the prime lending rate and three times that of a home mortgage. The mortgage industry serves as the primary industry assisted by deregulating usury ceilings. The massive profits earned by credit card issuers are evidence that today's high rates are far above what is necessary to protect against the inevitable losses incurred by opening up the market to high-risk lenders.11 3 By specifically targeting usury ceilings in the credit card industry, one of the greatest unintended consequences of 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 readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices. Id. (emphasis added). 110. Kathleen Day, Fed Plans to Revise Credit Card Rules, WASH. POST, May 24, 2007, at D1, 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 of 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 are applied far too broadly. V. CONCLUSION A return to limited usury protections would stand in line with legal precedent and public policy going back to Biblical times regarding debt forgiveness and protection for individuals from being overwhelmed by imposed debts owed to others. 114 Reestablishing usury protection for consumers can then allow for an economic system more in line with legal concepts rooted in fairness and justice building upon ancient legal concepts defining our society. 115 In such a way, one of the great unintended consequences from modern policymaking can be rectified and gradually turn around a status quo that harms the American consumer.

114. 115.

Deuteronomy 15:1. Ackerman, supra note 16, at 85-99.