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 4
Court
decision, paved the way for the credit card industry's unprecedented rise.
This rise has paralleled an explosion in the personal bankruptcy rate and5
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/pl7s02-
wmgn.html.
 SOUTH DAKOTA LA W REVIEW [Vol. 53

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 10
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.
2008] THE DEREGULATION OF USURY CEILINGS

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
usury and drafted laws to defend against it. 13 Even 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).
 SOUTH DAKOTA LA W REVIEW [Vol. 53

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
31
in place. These
credit purchase systems expanded rapidly into the 1970s.
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. Peterson, supra note 1, at 864-65.

26. Id.
27. Id. at 865. See Brown & Plache, supra note 2, at 68.
28. Peterson, supra note 1, at 865. See Brown & Plache, supra note 2, at 68.
29. Brown & Plache, supra note 2, at 69.
30. Id.
31. Id. at 69-70. See Peterson, supra note 1, at 865.
32. Lawrence M. Ausubel, Credit Card Defaults, Credit Card Profits, and Bankruptcy, 71 AM.
BANKR. L.J. 249, 260 (1997) [hereinafter Ausubel III].
2008] THE DEREGULATION OF USURY CEILINGS

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
such as Citicorp had relocated many of their central operations
40
to South Dakota,
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.
 SOUTH DAKOTA LAWREVIEW [Vol. 53

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
52
consumers to buy or invest
in a manner previously unavailable to them.
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.
2008] THE DEREGULATION OF USURY CEILINGS

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
banks derived tremendous profit from these rates with profit margins
60
running at
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
high inflationary environment.
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.
 SOUTH DAKOTA LA W REVIEW [Vol. 53

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).
2008] THE DEREGULA TION OF USURY CEILINGS

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.
 SOUTH DAKOTA LA W REVIEW [Vol. 53

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 80
at consumer expense
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 from82
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 83
time it will take to pay their balances if
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).
82. TAMARA DRAUT & JAVIER SILVA, DEMOS, BORROWING TO MAKE ENDS MEET: THE GROWTH
OF 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.
2008] THE DEREGULATION OF USURY CEILINGS

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.
The renewed focus on practices usurious8 9in nature has prompted a renewed call
for regulation of the lending institutions.
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
protects lenders at the consumer's expense. The bankruptcy bill, which
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
attorneys to certify the accuracy of93their filings. This increases the cost and time
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
more if the9 money
4
is made available to them, even if they do not have the means
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. Id.
93. HORSLEY, supra note 90.
94. Id.
 SOUTH DAKOTA LA W REVIEW [Vol. 53

credit card debt. 95 Further, they complain about the costs inherent in offering
credit services and96 the bankruptcies that cost the credit card industry millions of
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 99
and strategies
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 Proposalfor
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.
20081 THE DEREGULA TION OF USURY CEILINGS

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
 SOUTH DAKOTA LAW REVIEW [Vol. 53

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 ''110
proposed new consumer-protection rules
that could take effect by year-end.
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/.
20081 THE DEREGULATION OF USURY CEILINGS

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. Deuteronomy 15:1.

115. Ackerman, supra note 16, at 85-99.