Yves here. We’ve tended to focus on unsavory practices on the institutional end of the financial services market because they played a major role in the financial crisis, yet have not gotten the media coverage they merit. But some questionable conduct on the retail end only gets intermittent attention, even though it is also a significant activity. Since the 1980s, financial services firms have increasingly shifted their business models to one where profits depend on charging high interest rates and fees to a small portion of their customers. And the charges are sufficiently large that these customer often wind up on a debt treadmill.
To give a sanity check: back in 2007, the Pentagon tried stepping in as a financial regulator of sorts to restrict practices it saw as predatory:
The rule will limit how much lenders can charge military personnel, and it could affect banks, credit unions, mortgage providers and payday lenders, among others.
The Pentagon is especially concerned about payday loans, which are typically two-week extensions of credit to cover quick cash needs between paychecks. They can have interest rates of 300 percent a year or more, pushing troops so deep into debt that they cannot focus on fighting.
Defense officials and some lawmakers argue that young, financially unsophisticated service members are particularly vulnerable to shady financial practices and deep debt, especially when lenders offering high rates and quick cash set up shop outside the gates of military bases.
The push against payday loans is part of a bigger effort to clamp down on financial practices the Pentagon sees as predatory. It follows efforts to boost standards for insurance sales after reports found the insurance industry had spent years offering unsuitable and expensive products to soldiers.
The limit on loan rates would be set at 36 percent — a number meant to drive the payday loan industry out of military lending.
Today’s update comes from Lynn Parramore of New Deal 2.0:
Aristotle called usury the “most hated form” of wealth-accumulation. Dante sent practitioners to the seventh circle of hell. The Qur’an proposes that usurers are controlled by the devil’s influence, and we’ve all heard how Jesus, that avatar non-violence, was stirred to a round of ass-kicking when he found the money lenders in Herod’s temple.
Screwing the poor through usury has been considered an abomination throughout human civilization – a disease of the body politic that sickens people morally and economically.
For two centuries, American states had the power to enforce usury laws against any lender doing business with its citizens. But in 1978, a Supreme Court case transformed the world of lending. In Marquette National Bank of Minneapolis v. First of Omaha Service Corp., the Supreme Court changed the interpretation of the National Bank Act of 1863 so that states could no longer regulate interest rates on nationally-chartered banks. BINGO! Big banks quickly saw a Big Opportunity. They would now be able to dodge interest rate restrictions by reinventing themselves as “national banks” and hightailing it to states with weak consumer protections. A small number of states chucked interest rate caps in order to lure credit card business and related tax revenue.
Thanks to that unfortunate 1978 decision, credit card divisions of major banks are based in just a few states, while local banks struggle with unfair out-of-state competition fight to stay afloat. Meanwhile, consumers across the country are gouged by stratospheric interest rates and fees.
An amendment submitted by Senator Whitehouse and cosponsored by Senators Cochran, Merkley, Durbin, Sanders, Levin, Burris, Franken, Brown (OH), Menendez, Leahy, Webb, Casey, Wyden, Reed, Udall (CO), and Begich aims to change all this by restoring state powers to protect their citizens with interest rate limits on lending done within the state.
Here’s a breakdown of what the amendment would accomplish:
* 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.
TARP watchdog and New Deal 2.0 contributor Elizabeth Warren argues that “the loopholes that let big banks escape local laws need to be closed. She explains that there is “no good reason why large institutions should be able to headquarter in states with lax protection and then do business all over the country without following local laws. Smaller banks have to comply with tougher local rules, and the big banks should have to do the same. We need a level playing field between small, community banks and big, national banks.”
Memo to Big Banks: Get ready, boys. There’s a New Sheriff in town.
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Nice! Perhaps there is some light at the end of this tunnel. Too bad so many people have been victimized in the name of “Free Enterprize”, and I’m a sworn capitalist and free enterprizer. I just spell it diferently, I guess.
A few more things like this might also have prevented the collapse and takeover of hundreds of small local banks, who were not connected well enough to qualify for government help.
See http://www.youtube.com/watch?v=uSOeZliaCgU for a nice description of predatory lending, CDOs (and rating agency practices)
This sounds like a worthwhile amendment, though in itself it’s just a modest start toward the real goal of smashing usury completely.
Kwak at Baseline Scenario wrote about this yesterday:
http://baselinescenario.com/2010/05/17/whitehouse-amendment-credit-card-interest-rates/
shredding the ABA’s idiotic argument against it. Short version: everything the banksters claim would be bad about this are actually precisely what would be the good effects.
We also see how Republican opposition to this highlights the fraudulence of their “states’ rights” pretensions.
And as the above post demonstrates, we see what a flat out lie it is when all these politicians claim to care so much about “the troops”. The same is true for anyone and everyone who supports predatory finance.
But just as soldiers shouldn’t need for the Pentagon to have to get involved in protecting them from domestic finance criminals (once again one wonders what they think they’re fighting for – a system which happily allows con men to systematically and legally prey upon them), so all of us should be fully protected by real laws enacted and enforced in the public interest.
But the kleptocracy, including the Pentagon (which certainly doesn’t care about the people as a whole, nor does it care about the well being of servicemen, except insofar as this may affect their military readiness), fully opposes all such laws.
Thanks for the link, attempter. The ABA’s arguments (as summarized by Kwak) were so inane that I thought Kwak must have picked the dumbest ones. But no, they only had one other argument (that sellers would have an advantage over banks because they could “hide” higher rates by jacking up their prices) and, while it was stronger than the ones Kwak summarized, was far from compelling. Most of them were transparent, weak, and laughable. And presumably those were the best arguments that the ABA could come up with. Let’s hope this legislation passes. I’ll be watching to see who votes for it and who votes against it.
Re: so all of us should be fully protected by real laws enacted and enforced in the public interest.
Perhaps they (the solders) are mean enough not to want “protection” by “a nanny government” because they fully believe that “survival of the fittest” makes for a stronger America; which increases its chance of survival against “those evil-doers” – who are “out to git-ya”. (They’re everywhere, look out!)
I don’t think anyone will rein in the banks. It’s just political posturing. Perhaps the interest rates on payday loans will be capped at 150%. Perhaps they will change the methodology. Perhaps the banks will sign global lending agreements with the Pentagon and cover all military salary for a mere 5% fee and 25% interest with full US government backing.
The only way to control Wall Street these days is with a wrecking ball. But who will wield the wrecking ball? The same politicians who handed several trillion in taxpayer money to Blankfein and co.?
That is the issue here in that we are so far down the rabbit hole that there is no obvious way to stop the direction of the beast outside of collapse….which can’t come soon enough if you ask me.
When the extend and pretend stops then maybe some adults can tell the rich they are not in control anymore.
About 2 months ago, either Yves or Jesse published the P&L of one of the big banks’ Credit Card operation. I just went looking for it, since it is the sort of thing I save for future reference. Couldn’t find it – BUT the point is this: The accounts showed a bad-debt provision of about 10% of total outstanding balances, and a revenue of about 20% of outstanding balances.
That indicates that the business model is sick, in the sense that credit is pushed onto people, even if they may have difficulty in meeting the repayments, while the banks play the statistical averages to ensure a profit.
That also fits with cases that I know personally where people who were really struggling, financially, being offered easy credit at rates like 28%. (I may be way out of date personally – I left the US 10 years ago – but it sounds much worse now)
I hope these initiatives are successful, but they are only a beginning, and don’t address the two-headed problem – Lenders who don’t care who gets hurt, so long as they make a profit, and suckers desperate enough or dumb enough to take the bait.
“Where profits depend on charging high interest rates and fees to a small portion of their customers.”
It is not just in interest that we see a problem. Bank overdraft fees are exorbitant. I have never struggled with them but I know plenty of young vulnerable people that have. The banks also game they system by scheduling payments, so if you have $60 in your account and you make a sequence of transactions for $10, $15, $25, $9, and $55; the bank will schedule the $55 transaction first and get you on overdraft fees on the other transactions that were actually made first. I suspect if you are paid on that specific day they may do the same thing. I have seen people get hundreds of dollars in fees on $5 in overdrafts, it is a bit sick. The industry tries to play it out like it is a service that they are providing to their clients.
Yves:
This is just one part of an issue permeating the economy today. Asset Appreciation taking the place of Value-Added Services and Manufacturing products produced with Labor Input. Spencer does a really nice graph showing the skewing of Productivity Gains to apital from nonfarm labor. http://2.bp.blogspot.com/_Zh1bveXc8rA/SuddUhLWUaI/AAAAAAAAA7M/iU2gefk317M/s1600-h/Clipboard01.jpg as taken from here: http://www.angrybearblog.com/2009/10/labors-share.html “Labor’s Share”
Congress in 1978, and after this Brennan written SCOTUS decision, failed to take action. Brennan later admitted he though Congress would react to plug the gapping loophole. Deleware and South Dakota did react and became the best places in which to charter a bank due to each state having the most liberal usury laws for credit cards. In essence it is easier to make greater profits through credit cards, CDS, CDO, etc than it is in manufacturing or service industry.
It is also not just high rates for those without a credit rating or those lacking a good credit rating; with the recent passage of the credit card reform bill, companies took it upon themselves to increase most credit card interest rates. Chase for example increased most everyone’s by 5% regardless of credit scores. Afraid of a dearth of credit to consumers, many of our good Senators, such as Senator Debbie Stabenow, failed to enact a cap on credit interest rates. When credit card companies started hiking rates before the bill was enacted, the Senate once againg failed to take action and enact the bill sooner. The Senate is not populus friendly which is a problem.
There’s something I don’t understand. Why in this case would “local banks struggle with unfair out-of-state competition [and have to] fight to stay afloat,” when that out of state competition is creating a price umbrella by charging high interest rates. Why wouldn’t the local bank simply eat the out of state player’s lunch simply by following their state’s stronger consumer protection rules?
I think it boils down to “people are stupid and lazy,” and the disagreement is whether the government has a duty to protect people from their own stupidity and laziness.
It is not that easy. The credit card industry enjoys tremendous economies of scale. That is the main reason for the consolidation that has taken place.
There are newer payment technologies coming on board that might change the landscape and together with new regulation could bring back the local banks/lenders into the picture.
Ding ding ding
You Matchoo, are a winner!
Yours is the first comment to blame it on stupid people.
Only you had the razor sharp intellect to truly understand that the poor and desperate are stupid, and (presumably) should be devoured by vultures.
Congratulations for your insighful analysis, and for your determined defense of shitty practices. You are part of the circle of shit now, and you earned it, for you are, sir, a piece of shit.
love the site, the pics, just about everything. the book, too. i’m totally in favor of “fixing” the busted financial system bus, but there is a downside to some of the solutions. merideth w has written for a couple of years about cc companies shrinking their books as a by product of stricter regulation and the tbtf shrink the banks progam and/or the basel higher more restrictive capital requirement make sense also, but both will have the effect of shrinking capital availability at a time when credit, private sector/consumer/etc, is still weak.
I hope someone will alert us at critical times when to write our Washington representatives, and who to support financially.
This is an interesting site. This is the first time I have been here, but have bookmarked you guys for the future!
The issue of federal regulation allowing the big banks to hide the true cost of credit raises, at least in my mind, the broader issue of why there is no meaningful “left” in the U.S.
Some of the emerging narratives of commentators on Naked Capitalism have lamanted the fact that no real “left” formation is actually now functioning in the U.S. Why is this the case?
Perhaps part of the answer can be found historically in the role of the “left” as an unwitting accomplice to the unfolding of corporate and state logic over the last 70 years.
One could argue that the “left” began to disappear as an organized political force when its role became primarily a type of shock troop for capitalist and state rationalization
The organization of labor unions in the private sector in the 1930s ended up successfully corporatizing the working class in much the same way that civil rights organizers in the 1950s and 1960s brought disenfranchised Southern blacks into the political system. Far from paving the way for a qualititive alternative to the existing system of domination, what evolved was a greater corporatization and centralization of political power (i.e. a similar phenomena has occurred with the organization effort to create public sector unions beginning in the 1970’s)
“Left” politics became focused on 1) mere renegotiation along more “just” lines of the redistribution of state money to disadvantaged sectors of the population, 2)mere enfranchisement of previously excluded groups within the political process and 3) mere defense of the common good against the greedy one-sidedness of powerful corporate interests.
Perhaps the crisis of the “left” is in fact a major reason for the crisis of our present system. Its ideology along with that of the right have both exhaused their respective capacities to explain events or inspire us to constructive action.
I had mentioned in a earlier post that the “left” had no political theory of the state and therefore became incapable of seeing it how it was being absorbed within the system it was supposedly attempting to change.
The breakup of Public and Private sector bureaucratization and centralization will demand new thinking and may demand of far more serious discussion of many issues often considered verboten by the liberal political community (for example, the important role of tradition in launching political resistance–because at some fundamental level we seem to be experiencing a moral collapse as well as an economic collapse.
It never fails to amaze me that the left (progressives, socialist, whatever) can’t comprehend that the majority of people are mean, nasty, and brutish, and the right (conservatives, fascists, libertarians, whatever) can’t comprehend that the meanest, nastiest, most brutish eventually will run everything if not regulated by the left. The nice people can only look on and hope they aren’t screwed (or worse) by either sides.
Fascists are of “the right”?!?! Whaaaat!?!?!? How do you define left/right if Fascism, commonly identified as totalitarian, statist in nature, normally encompassing a collusion of gov’t & corporate industry, is “rightward”? Is it just the propagandist reactionary attitudes that make you see it as “of the right”?
FYI, as a libertarian, I see “rightward” as being less gov’t power, while “leftward” is more gov’t power (in extremis: communism). By my definition, fascism is next door to socialism, which is next to communism, located over on the far left.
BTW, Libertarians have no illusions about the error-prone, power-hungry nature of humankind. That’s WHY we don’t want a powerful gov’t …
… and oh yeah, don’t trust any modern day Republican or corporatist to claim they’re “of the right” … they are, in fact, very much fascist, and out for themselves.
Seems to me that the usury laws perfectly fit the psychology of American society. It’s mean. If you have to convince the peasants NOT to be mean to each other… well, ya get the government ya deserve.
Here’s a great example of usury and general fleecing. My wife recently got a “NetSpend” pre-paid debit card from a vendor as payment for her biz–not that she wanted it.
Here are their fees:
Signature Purchase Transactions: $1 per trans
PIN Purchase Transactions: $2 per trans
ATM Cash Withdrawal: $2.50 (not including the fees from the ATM bank itself)
Bill Pay Transactions: $1 per trans
So to get any money off of this card without spending it, we have to pay $2.50 + the bank’s ATM charges of $1.50 to $3. There is also a $325 max withdrawal per ATM transaction. Ridiculous. I called to see if we could simply transfer the money to another bank account–nope, they don’t offer that service.
Pure and simple fleecing of the public with no material benefit to the revenue foregone. The U.S. will not have a future if these practices are allowed to stand.
I honestly am conflicted by this. The assumption appears to be that, for the most part, the same loans would be made at lower interest rates. This may sometimes be true, but other times will certainly not be. So choices will be limited. The question, then, is who is better able to determine his own best interests, the individual or his government? To make an extreme case, suppose my choices are to borrow at 300% annually or rob a convenience store. If we limit borrowing chices, what else do we stop? Gambling (which for some is addictive) would seem an easy choice. And the odds offered by legal (state-sponsored) sweepstakes are as bad as the most usurious lending. The tendency to legislate easy solutions, though often undertaken with the best of intentions, often produce very bad results. for example, they sometimes merely replace legal with illegal sellers. In this case, a big part of the problem is that some people have such a high rate of discount on the future that usurious borrowing is a good deal for them.
What? You say a person’s credit history can’t be damaged by illegal lenders? Would you rather have a good credit history, or all your fingers?
It’s a moral issue, which is why the deities used to handle this by whispering the rules to the guilt-ridden priests, prophets, and ministers. When you leave the decision to the amoral types, well – anything goes. And guilt no longer applies anymore (only shame), so – pretty much – the amoral types are making all the rules now. I know, personally, I don’t give a rodent’s butt about other people – I only care there’s a buffer between “the other people” and myself (I’m amoral, but not as smart as the banksters).
What most Americans can’t comprehend, apparently, is that there’s very few “other people” left. The smart amoral scumbag are now ripping off everybody.
The defense line for me – and everybody else – started at the Payday Loan shop. You let the smart amoral scumbags rip-off those people, and – well – who’s next? Me.
Lynn Paramour perpetuates the simple and heroic but mistaken idea that Jesus attacked shady ‘money-lenders’ lurking in corners of the hallowed precincts of the Temple. The truth is more complex.
The Bible (Matt. 21:12)refers to them as “money-changers” along with “them that sold doves” in the Temple. Sacrifice to the Temple was part of the religious observance of the devout Jew but the Temple authorities had declared that money donations or animals bought for sacrifice had to be transacted in the original Jewish coinage which had been replaced by the currency imposed by the Roman occupiers.
Thus in order to make sacrifice as required the devout Jew was first forced to exchange his Roman currency into the discarded Jewish one, which only the Temple possessed. Hence the ‘money-changers’ attacked by Jesus were actually Temple officials changing denari into shekels (at a rate set by the Temple) while the sellers of animals for sacrifice were forced to deal in shekels which they then had to convert into denari through the Temple, again at the rate set by the Temple. Hence the Temple was coining it in a way that would make even Lloyd Blankstein blush!
Jesus’ action should therefore be seen as a direct attack on official corruption within and sanctioned by the Temple itself, which explains the ‘displeasure’ of the priests (Matt. 21:15) and why they were keen to put him to death (Matt. 27:59)
nb. This also underlay the ‘trap’ set for Jesus in Luke 20:22 – Was the Temple correct in refusing to accept Roman coinage bearing Caesar’s image (Caesar was worshipped as a god by the Romans) as a sacrifice to the god of the Jews. Jesus clearly didn’t agree with the Temple’s policy but was then unwilling to make an issue of the point and neatly sidestepped the issue. “Render unto Caesar what is Caesar’s and God what is God’s.”
Nice post.
Funny … I thought the best way to avoid usury – and punish the banks at the same time – was pay cash for goods and services.
It also helps to shop around for credit and not borrow if rates are too high.
Cash is only slower, not worse.
>>>>>
I have a book coming out in 2011, to be called Treasure Islands, where I (among many other things) examine this episode in some detail – 1978-81 and specifically Delaware’s role in busting usury caps.
Nicholas Shaxson
Not only did the banks gain the right to usury via deregulation, there is an inverse of usury in place: the artificially low interest paid on savings.
Worse is the creation of a nation of debtors. We all owe on things our parents or grandparents would have owned outright. It changes the mindset from having a stake in society to a peasant class susceptible to the decoy that credit is all that counts. Without noticing, we’ve accepted the paradigm of being on the interest paying hamster wheel instead of owning anything.
Awesome blog.Really looking forward to read more. Keep writing.
The question I have is why isn’t competition working and what changes can be made to make it work? Letting legislators set caps and affectively decide what is a fair interest rate doesn’t seem like the way to go to me.
If poor people are willing to borrow at 300% a year why isn’t there a company trying to steal all the business by offering to lend at 250% a year? If the system worked properly competition would drive down the rate and fees. I don’t think our legislators are on the right track by trying to cap rates and set new rules without understanding why someone is willing to borrow at 300% and why competition hasn’t driven down those costs. I think Ms. Warren is well intended, but you need to understand the problem before you try and fix it.