Whitehouse Interstate Lending Amendment, Fixing an Old Mistake

Speaking of preemption…I assume you know why credit card rates are so uniformly high in the country – it’s because all the credit card companies decamped to South Dakota, where they can charge anyone in the country according to the lax South Dakota rules.

This is the result of an (activist?) Supreme Court decision in 1978, Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp, where the Supreme Court interpreted the word “located” in the National Bank Act of 1863 as meaning the location of the business and not the location of the customer. This creates a big problem – if South Dakota moved to regulate credit card rates in anyway the industries will just move to the next state. All states would have to move together, presumably through Congress, but that would be inefficient – Idaho doesn’t have the same credit markets as Vermont which doesn’t have the same credit markets as Texas.

So why not just update the National Bank Act to go to the original meaning? A credit card company can be situated in South Dakota, but if it is lending to California it has to follow California’s rules. If it is lending to Texas, it has to follow Texas’ rules. This combines local knowledge, federalism while still taking advantage of national credit markets in a powerful way.

There’s an amendment that will do this: Whitehouse Interstate Lending Amendment. text, and summary:

The Whitehouse Interstate Lending Amendment would:

– 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.

It is co-sponsored by Senators Merkley, Durbin, Sanders, Levin, Burris, Franken, Sherrod Brown, and Menendez.

A couple of things:

– I’ve heard that Brennan did this with the thought that Congress would immediately take up the slack and change the Banking Act of 1863 to compensate, a suggestion I think I first heard from Thomas Geoghegan’s See You In Court: How the Right Made America a Lawsuit Nation. From wikipedia:

“In terms of changing our lives”, says Chicago labor lawyer Thomas Geoghegan, “it may be the biggest case of our lifetimes…The effect was to gut every state law on usury”, he says. The 1863 Congress, Geoghegan complains, couldn’t have imagined credit cards when it passed the National Banking Act. He conceded that Brennan’s opinion is technically right, but speculates that the justice thought Congress would step into the gap afterwards and enact a national credit-card rate cap, although that was politically unlikely at the time.

– Credit Slips’ Bob Lawless has an excellent post on this:

I’ve long thought that overruling Marquette would be a wise move. The decision laid the groundwork for the the consumer credit culture we have today and is arguably one of the most momentous (but often overlooked) Supreme Court decisions of the last fifty years. Also, as an interpretation of a technical provision a 110-year old statute, Marquette might also win the prize for the Supreme Court decision with the most unintended consequences.

If you think interest-rate regulation is a bad idea, nothing in the Whitehouse amendment should bother you. It merely shifts the power to make decisions about interest-rate caps to the states and away from Washington bank regulators. California can enact laws appropriate for the conditions there, just like South Dakota can enact laws appropriate for its citizens. The Whitehouse amendment does not take any position on whether the appropriate law is a high cap, a low cap, or no cap at all. California or South Dakota or Delaware or any other state just would no longer be able to export their interest-rate laws to other states. It would allow the states to be laboratories of democracy, as the saying goes, and experiment with interest rate regulation. Also, it should be noted that the amendment would not apply to interest rates on home mortgages…The Whitehouse Amendment deserves more attention than it is getting.

– I can already hear the “increased cost of credit!” ammunition being loaded, but if you take the level of sophistication that goes on with current quant modeling of consumers, an extra field for zip code is miniscule compared to the vast churning of personal data the credit card companies’ computers are doing on you should be the default assumption.

From what I hear, this amendment could come up for a vote as early as tomorrow. In terms of changing the game of consumer finances so that local knowledge and activism can be used to make positive changes, this would make a big difference.