States have the right to control interest rates for their decision, which was an obstacle for national credit card companies in the late 1970s. Were it not for the Marquette decision (Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. (1978)), the credit card business would have little growth outside of major metropolitan areas.
The Marquette decision allowed credit card issuers to transport their rates to other states. Smart issuers moved their businesses to liberal states such as Delaware and South Dakota. During the early 1980s, I personally spent a great deal if time flying Mesaba Airlines from Minneapolis to the thriving metropolis of Sioux Falls, South Dakota as Citibank took advantage of the new ruling.
The American Banker covers the topic of nationalizing credit card interest rates. Mercator Advisory Group’s opinion on the matter is that if an interest rate mandate takes place and disallows credit card companies to price their accounts to the level of risk, there will be a severe lending slowdown.
- The vast majority of states have some kind of interest rate cap on consumer loans. But when it comes to setting a national rate cap, Congress seems to want no part of it.
- The lack of legislative progress on a national level can be attributed to several factors. For one thing, unlike other consumer protection issues, the rate cap issue seems to divide even Democrats, with key lawmakers in the party opposed to the idea.
- Meanwhile, consumer advocates say financial services firms have aggressively — and successfully — lobbied to fight rate cap legislation. Despite various proposals, a national usury law just seems off the table.
Banking is a for-profit industry. Credit is not a social right such as healthcare, safety, or access to water. Credit involves risk and creditors need to be rewarded for assuming it.
- “Although we can understand why some people think it’s inappropriate for there to be higher interest rates, we also know that there will be a lot of people who will lose access to credit when you put a cap like that on interest rates,” said Jeffrey Naimon, a partner at Buckley LLP. “We don’t have any other mechanism in our society for these borrowers to handle the financial circumstances that cause them to seek higher-priced credit.”
Credit card companies need to be able to price-to-risk. You can’t charge everyone the same rate. Good customers will have no need for the product and risky customers will get a free ride. The business model today is not broken. Hopefully, Congress will not try to fix it.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
