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Loophole lets credit card rates rise

February 18, 2009|DAVID LAZARUS

After reading my Sunday column on how banks are jacking up credit card rates, Santa Clarita resident Hank Lee wanted to know why usury laws weren't keeping interest rates at reasonable levels.

"How much is enough?" Lee asked me. "Is 'compassionate capitalism' such an oxymoron?"

My knee-jerk reaction was to say yes. But let's take a closer look.

First, a defining of terms. The Merriam-Webster dictionary defines "usury" as "the lending of money at exorbitant interest rates" or "an unconscionable or exorbitant rate or amount of interest."

Usury laws vary from state to state. In California, according to Article 15 of the state Constitution, the interest rate for loans "primarily for personal, family or household purposes" can't exceed 10% annually.

Waitaminnit, I hear you saying, my bank just jacked up my credit card rate to nearly 18%. This happened to Los Angeles resident Mary Iroz, who recently heard from Capital One that her annual rate was jumping to 17.9% from 9.9%.

"I pay my bill off monthly, have no late payments and have an excellent credit score," she said.

"If this is being done to my account given my history, I wonder what they are doing to people who have lost their jobs, are relying on their credit cards and are having difficulty making payments."

In letters to cardholders, Capital One blamed the higher rates on "changes in the credit environment."

As I wrote on Sunday, millions of cardholders have been notified by leading banks that their rates are either going up because of "market conditions" or could rise as high as 30% if a single payment is missed.

This partially reflects higher default rates faced by financial institutions.

But it also reflects an attempt to have cardholders help pay the tab for billions of dollars in losses from the banks' betting wrong on the housing boom.

Some of these same banks have received billions of dollars in bailout cash from taxpayers.

So how can a California cardholder legally be charged more than 10% annually for credit card loans? Turns out there's a big, fat loophole to the law.

Among other exemptions, the state Constitution says the usury law doesn't apply to "any bank created and operating under and pursuant to any laws of this state or of the United States of America."

Say what?

Consumers are protected from usurious interest rates imposed by almost anyone except the guys who bombard us with reams of credit card solicitations offering all manner of sweetheart deals and then change contract terms faster than you can say "bait and switch"?

Christine Gasparac, a spokeswoman for California Atty. Gen. Jerry Brown, said the problem was one of federal preemption. She said the National Bank Act of 1863 generally prevented states from telling banks how to conduct their business.

"Preemption ties us all in knots," Gasparac said. "We can't just ignore laws that Congress has passed."

Nor can California ignore decisions handed down by the U.S. Supreme Court. The justices issued a doozy in 1978 when they ruled in the case of Marquette National Bank vs. First of Omaha Corp. that a bank can charge all customers, no matter where they're located, whatever rate is allowed by the bank's home state.

Shortly afterward, opportunistic lawmakers in South Dakota tossed their usury law out the window and invited Citibank to move its credit card operations -- and thousands of taxpaying workers -- to the state.

Citi was only too happy to oblige, and this is how the bank gets away with charging California customers 30% if you miss a single payment. South Dakota is now also home to some of Wells Fargo & Co.'s credit card operations.

Delaware followed South Dakota's lead and junked its usury law as well. The state now hosts the credit card operations of JPMorgan Chase and Bank of America. Other states with nonexistent or weak usury laws include Arizona, New Hampshire, Utah and Virginia.

With Marquette in place, it's clearly futile for California to try to practice tough love when it comes to national banks' credit card rates. They'll just keep moving their card operations to states that think sky-high rates are perfectly fine.

But that shouldn't stop us from cracking down on California-chartered banks, or on parasitic payday lenders that charge annual rates of 400% or more.

Yet the sweeping loophole in our state Constitution gives all banks a get-out-of-jail-free card.

The attorney general's office acknowledges that there's a problem.

"This raises important questions about whether we have a sufficient usury law in the state of California, and whether something should be done about it," Gasparac said.

As the Bible says, "Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee."

"Compassionate capitalism" might be an oxymoron, but Scripture suggests that the notion isn't so farfetched. It's time for California's Constitution to reflect that idea as well.

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David Lazarus' column runs Wednesdays and Sundays. Send your tips or feedback to david.lazarus@latimes.com.

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