Academic journal article South Dakota Law Review

The Deregulation of Usury Ceilings, Rise of Easy Credit, and Increasing Consumer Debt

Academic journal article South Dakota Law Review

The Deregulation of Usury Ceilings, Rise of Easy Credit, and Increasing Consumer Debt

Article excerpt

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 Court decision, paved the way for the credit card industry's unprecedented rise. (4)

This rise has paralleled an explosion in the personal bankruptcy rate and consumer debt in this country that has not been seen since the Great Depression. (5) 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 startling rise in personal bankruptcies, with 1.3 million filed in 1997 alone. (8) 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 disastrous consequences for those it is purportedly meant to help the most. (10) 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 (11) and now spreading to Wall Street. (12)

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. …

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