Loan Shark Capital says Banks Love Us: Let Consumers Eat Cake

December 16, 2009

eat cakeA “Where’s the Outrage?” column by CWN Managing Editor Terry Smiljanich has raised the ire of some law makers and bankers in South Dakota. Smiljanich called South Dakota the “Loan Shark Capital of the World” and wrote about how that state’s legislators are to blame for opening the flood gates for banks to charge outrageously high interest rates on credit cards in all 50 states. The Sioux Falls Argus Leader did a story about Terry’s column, in which they talked to some state officials who used the old stand-by “it’s best to let the market work it out.”  Well, of course, we all know how well trusting corporate America has worked out. Read the Argus Leader story below. Terry will respond in a new column soon.

Consumer group: S.D. interest rate law a sham

State officials say regulation best left to the marketplace

December 15, 2009
Anna Bahney

South Dakota is called the “loan shark capital of the world” by a Florida-based consumer advocacy group because of the high interest rates banks based here can charge on credit cards.

The nonprofit Consumer Warning Network is urging credit card customers across the country to contact South Dakota lawmakers and complain about banks that charge up to 36 percent interest.

“What I think people ought to do is to ask a simple question: Do you think this is fair? And what are you going to do about it?” said Terry Smiljanich, managing editor at the Consumer Warning Network. “I dare any South Dakota legislator to stand up and say with pride we are happy credit card companies charge 36 percent.”

Consumer Warning Network is a nonprofit established by former federal investigators, prosecutors and investigative journalists to empower consumers.

Banking officials said that credit card statements with high interest rates are hardly being mailed from South Dakota alone.

Delaware, for example, has more large credit card operations than South Dakota.

Nevada also has open lending laws which allow higher interest rates than many other states. After South Dakota’s laws were removed, other states followed suit to compete for business.

“I don’t think it is something unique to South Dakota, it is an epidemic countrywide,” said state Sen. Scott Heidepriem, the minority leader and a gubernatorial candidate.

He added that an idea behind removing the usury limit was to put the rate in the market’s hands.

“When we changed the law, we said we’re going to bet the marketplace sets the limit, not some arbitrary rate,” Heidepriem said. “We benefited greatly from that.”

‘Marketplace is there to sort it out’

Despite the rising interest rates, he said that the governor on the rate should remain the market.

“The marketplace is there to sort it out,” he said. “And, hopefully, it will.”

In May 1980, when South Dakota’s law eliminating all usury laws – which state that interest shall not be charged above a certain percentage – was enacted, it was a move by then Gov. Bill Janklow to entice new businesses with high-paying jobs.

In short order, Citibank announced it would shift its credit card operations to Sioux Falls by summer to evade New York’s interest rate limit of 18 percent on credit card balances of less than $500 and 12 percent on balances above $500.

Other banks followed.

Credit card balances slide again

The average consumer credit card interest rate in the U.S. is 12.75 percent, up from 12.05 percent six months ago. As banks make it more expensive to use cards, consumers have scaled back their credit card debts. Federal Reserve data released last week showed that card balances fell in October for a record 13th consecutive month.

Asked for a reaction to the organization’s appeal, Roger Novotny, the director of banking for South Dakota, said he doesn’t think too much of it – considering it is coming from Florida.

“Florida was one of the centers of the subprime mortgage mess,” Novotny said. “For people in Florida to be pointing to us and saying we’re the problem, at the point we are at economically, is laughable.”

Financial literacy called bigger worry

Novotny contends that high-cost unsecured-debt is not treated that much differently in South Dakota than in other states.

“Our restrictions are at times very similar to theirs. Other states have subprime credit issuers,” he said.

The usury rate, Novotny added, is a smokescreen. Risk drives interest rates, he said.

In that case, is a 36 percent interest rate on a credit card too high?

It depends on the credit worthiness of the user, Novotny said. Of more concern to him is financial literacy and making sure that people know what they are signing on to when they get a credit card.

“I bet you people do more research buying a flat-screen TV more than getting a credit card, and that’s a crime,” he said.

At what point will high credit card rates tarnish South Dakota’s image? Not any time soon, Novotny said.

“I don’t see that our reputation is tarnished as a financial service center. They provide employment for a lot of people and provide access to the credit for a lot of others.”

But for Smiljanich of Florida, who said he has spent time in Sioux Falls and the Black Hills, the state has lost some luster.

“Not as far as your state’s natural beauty goes,” Smiljanich said, “but as far as your politicians go, they should be ashamed.”