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Usury

Usury (lending money at excessive interest)

Why are we in such a financial mess? It started in 1978 when the U.S. Supreme Court ruled that banks could lend at interest rates set by the state where the bank is chartered and not where the loan is made (Marquette National Bank v. First of Omaha Service Corporation). In effect Minnesota could not enforce its usury law against a credit card issued by a Nebraska bank. The effect of that was that banks set out to find states that had no ceilings on interest rates. And you wondered why credit cards were being issued from South Dakota?

Reasonable state limits of 5 to 9 percent were cast aside as states repealed their limits and lessened any usury laws in order to meet the competition. Interest rates spiked.

Of course, ceilings on interest rates are still on the books in many states and you will often read that it is against the law to charge too much interest. However, Congress took care of those state laws when it comes to mortgages and credit card issuers.

In 1980, when inflation was raging, the U. S. Congress passed the Depository Institutions Deregulation and Monetary Control Act exempting federally-chartered savings banks, installment plan sellers and chartered loan companies from state usury limits. This effectively overrode all state and local usury laws. This law enabled predatory mortgage lenders to make seemingly affordable loans, like adjustable rate and interest-only loans that lead to foreclosure for so many people. Also state-chartered banks were given the same ability to charge out of state customers the highest interest rate permissible in the state where the bank is headquartered.

Federal law delivered the death blow for a state’s usury limit in 1999 with the Gramm-Leach-Bliley Act, a section of which permitted local banks to charge the greater of the state usury limit or the rate charged by an out-of-state bank with a branch in the state.

The sky is the limit!

Now let’s see who was in charge when all this happened. In 1980, Democratic President Jimmy Carter signed the DIMCA and in 1999 Democratic President Bill Clinton signed the Gramm-Leach-Bliley Act. So much for blaming this financial mess on just the deregulation movement of the conservative Republicans. Democrats are right in there with them.

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