When our founding fathers fought the Revolution, one of the things they fought for was the right to have a say in the laws that governed them. And they achieved much of what they wanted: Californians can vote on California's law, New Yorkers can vote on their representatives, and so on.
But one exception is consumer loans, including credit cards. Chances are you have no voice on some of the laws applying to the loans you've taken out, such as the laws governing the interest rates you pay. Your credit card is almost certainly governed by the laws of South Dakota or Delaware, states that -- unless you live there -- you have no power in.
That's because of a little-known Supreme Court decision interpreting an even more obscure 1864 law that allows lenders to decide which state's law applies to the loans they make. And it leads to bizarre results. For example, when the Wiseman family of Arkansas wanted to buy a car from an Arkansas auto dealer, the dealer referred them to an Oklahoma lender owned by another Arkansas company. The lender wanted to charge an interest rate that would have been illegal under Arkansas law, but while that's where the car was bought, sold, and, for all practical purposes, financed, the lender was able to have the higher Oklahoma limits apply -- even though the car might never be driven in Oklahoma.
Why should you care? When lenders can pick the rules that apply to their loans, they choose the state laws which are most favorable to them, and least favorable to consumers. So credit card issuers base their operation in states like South Dakota and Delaware, which permit them to charge interest rates to citizens of New York, say, that New Yorkers consider excessive -- but the lenders don't have to care because New York can't apply its own laws to its own citizens.
Meanwhile, states that want the jobs credit card issuers bring have an incentive to allow lenders to charge high rates to attract those jobs. And if the credit card issuers charge high rates to the citizens of other states, well, why should South Dakota's officials care? The citizens of those other states don't vote in South Dakota's elections. But the bank employees living in South Dakota do.
The 1864 law that led to this was never intended to permit South Dakota to rule credit card lending throughout the country. Indeed, credit cards were still a century in the future. And so Senator Whitehouse, in Washington, has proposed to change this archaic law to permit states to apply their own usury laws to their own citizens.
Nothing in Senator Whitehouse's amendment would prevent lenders from lobbying for high usury limits. States may in fact be persuaded by those arguments. But it would prevent South Dakota from applying its usury laws to people who may never set foot in South Dakota.
Our founding fathers fought -- and some died -- so our citizens could have a voice in their laws. It's time for voters to get that voice on loan terms.
Jeff Sovern is a professor of law at St. John’s University School of Law and co-coordinator of the Consumer Law and Policy Blog.