South Dakota: Loan Shark Capital of the World

December 9, 2009

By Terry Smiljanich:

Why this State is to Blame for your

High Credit Card Interest Rates

Bank of America, among others, charges up to 36% interest on credit card debt. How can financial institutions get away with charging consumers such historically high interest? Isn’t it criminal to do so? Isn’t it “usurious?” If not, who’s responsible for letting banks get away with this? Remember when 18% interest was considered high on consumer debt? Remember finance charges of 6%? How did we get from there to here? Enter South Dakota.

Click here to learn the lame excuses South Dakota is offering up for why it’s the loan shark capital of the world.

What is Usury?

“Usury,” an ancient concept, is the charging of excessive interest on loans. For millennia, governments and religious authorities have proscribed how much of a fee rich moneylenders can charge for renting their money out to those in need of a loan. Religions actually forbade the charging of any interest at all. The Old Testament, for example, condemned usury. “If you lend money to any of my people that is poor by you, you shall not be to him as an usurer, neither shall you lay on him usury.” Exodus 22:25. In 1179, the Catholic Church’s Third Lateran Council declared that persons who accepted any interest on loans should be denied the sacraments and Christian burial. Islamic law generally forbids the charging of interest on loans.

In the 16th Century, Henry VIII broke with Vatican law, and England enacted a law allowing interest on loans, but capped it at 10% maximum. Thus, the common law brought over to the United States at its formation allowed interest charges, but recognized that legislatures had an obligation to the public to see to it that ‘usurious’ rates by moneylenders were prohibited.

Impact of High Interest Rates

At historically high rates like 36%, a $10,000 loan can balloon to almost twice that amount of debt in just two years, and by year five you would owe almost five times as much as you originally borrowed.

Even college student loans can charge usurious rates like 22% that saddle young people when they’re most vulnerable. Working at a low paying, entry level job when you graduate (if you’re one of the lucky ones to get a job), makes it near impossible to pay it off.  In just ten years at 22%, you owe more than $73,000 on that $10,000 loan, and you can’t even discharge the debt in bankruptcy. You are stuck in life with a millstone around your neck dragging you down in an ocean of debt. Meanwhile, Bank of America declared a profit of almost $2.5 billion in the second quarter of 2009. Anyone want to try and justify that disparity?

Who’s to Blame?

So how did we get from 10% to 36%? Every state in the Union has usury laws prohibiting criminal interest rates, right? Up until 1979, for example, Florida capped interest rates on debts under $500,000 at 10%. During the troubled inflationary period of 1979-1981, when inflation ran at an annual average of 11.7%, Florida raised that cap to 18%. During the last three years, with inflation dropping down to 3.3% a year, how can you be charged 36%, twice the Florida cap?

Thank your friendly politicians, both Republicans and Democrats, with a special shout out to the indefatigable efforts of former Texas Senator Phil Gramm and former Treasury Secretary Robert Rubin. In 1999, Congress enacted the Gramm-Leach-Bliley Act (GLBA), with the final deal brokered by Secretary Rubin and signed into law by President Clinton. The Act allowed banking institutions to get into the investment banking business, thus allowing the spate of mergers that expanded Citigroup, Wells Fargo and Bank of America into financial super giants.

In addition, the Gramm-Leach Act slipped in a new twist to usury laws in this country. From now on, a financial institution could charge interest everywhere according to the laws of any state in which it had a branch. Hmmm, what’s that all about?

South Dakota Starts the Slide Down a Slippery Slope

As it turns out, the business friendly state of South Dakota, home of the Sioux Falls Canaries baseball team, has an interesting take on usury law. South Dakota did away with the concept of usury altogether, allowing institutions to charge whatever interest rates they deemed appropriate. 18%? Why not just double that to 36%?

Suddenly, South Dakota became a very, very popular state with financial institutions. In fact, Wells Fargo liked the Canaries baseball team so much it decided to merge all 19 of its bank charters into one big bank, Wells Fargo Bank, N.A., headquartered in Sioux Falls, where the average January low temperature is 3 degrees.

Bottom line? Credit card companies no longer have to deal with pesky usury laws. Thanks to banking lobbyists and politicians from both parties, financial institutions are subject to fewer restrictions than the Mafia, which still has to deal with local state usury and racketeering laws. Tony Soprano was in the wrong business all along!

Unhappy Ending

That’s the sordid story of how credit card companies can literally charge criminal rates on their credit cards. And what about the original architects of this destruction of our laws, Phil Gramm and Robert Rubin? Gramm is Vice Chairman of the Investment Banking Division of financial giant UBS, which just raised the bonuses of its financial managers. Robert Rubin became Chairman of Citigroup, where he made more than $126 million in salary and stock in his eight years of running that company straight into a government bailout.

What would these gentlemen say about the plight of those burdened by criminal interest rates? “Stop whining,” said former Senator Gramm. Even Marie Antoinette, on the eve of the French Revolution, was a little more sympathetic with her suggestion to those without bread: “Let them eat cake.”

Write Your Congressmen

Now it’s your turn.  Write to your Congressmen.  Here’s a link to find your Representative, and here’s a link to find your Senators. Write them, call them, do whatever feels most comfortable, just tell them what you think.  Oh, and here’s a link for those South Dakota Legislators, too.

Edited by Angie Moreschi