__ The Senate Financial Overhaul Bill __ For Consumers, It’s a FinReg Flop!


On April 19 I wrote an article critical of an amendment proposed by Senate Durbin to the Senates’s FinReg bill which would have capped the interest rate ceiling on consumer loans at 36%. Senator Durbin said that he tried to pick an interest rate high enough that even the biggest banks could not object.  Guess what?  They objected.    

Senator Durbin did not get his way with his 36% interest rate cap.  What the American public got instead was a kick below the consumer belt by Senate Republicans.    According to Reuters, the Senate  gave a 35 -60 thumbs-down vote on the Senator Sheldon Winehouse amendment, that could have put the brakes on predatory consumer loan lending.  What the Senate did for consumers was to let the large national banks, which do most of the credit card business in the United States, continue to be allowed to charge basically any rate anywhere that they wanted.  Their rate limitations, to the extent that there will be any, will largely be determined by the laws of corporate friendly Delaware and South Dakota which, essentially, have no interest rate limitations for consumer loans.  States will not be allowed to set their own interest rate caps within their states on lending done by national banks.

I haven’t looked at the analysis of the Senate vote, but I think I can safely stick my neck out and say that the 60 votes were overwhelmingly Republican ones.  If they want to vote their conscience for special big banking interests, then so be it.  But voting against an issue that gives the states more regulatory rights doesn’t quite jibe with the Republican Party line – that is, unless it is convenient to do so.  The Winehouse vote just confirms that the Republicans use state’s rights’ issues only when it is politically expedient (Bush-Gore comes quickly to mind).  I guess that there isn’t a constitutionally based principle in their bodies when it goes against their Wall Street buddy-banks.  It’s sickening. 

 Unless the House of Representatives does something drastic in the reconciliation process (don’t get your hopes up), the die is cast.  Of course, that means that we can look forward to endless TV commercials; mail solicitations will start rolling again; and people will continue to get fleeced.  But according to 60 Senators, that’s OK.  In fact, not was it only OK, they pressed the button that will make it happen.

I wouldn’t count on increased disclosure on credit card statements to do much of anything to alter the consumer loan landscape.  You don’t have to put in capital letters on the front of someone’s credit card statement that they will likely get in financial trouble.  They already know it.




Mr. Perfect "36"

 “By a ‘silly’ theory I mean one which may be held at the time when one is talking or writing professionally, but which only an inmate of a lunatic asylum would think of carrying into daily life….It must not be supposed that the men who maintain these theories and beliefs are ‘silly’ people. Only very acute and learned men could have thought of anything so odd or defended anything so preposterous against the continual protests of common sense.”       C.D. Broad

I woke up fresh today, grabbed the early morning newspaper, started sipping my orange juice and nibbling my lightly buttered toast, when I was startled, not by a knock on the door, but by a story about Senator Richard Durbin’s news conference yesterday.  The article  in the Senator’s hometown newspaper, The State Journal Register in Springfield, Illinois, stunned me.  In it, 


 Senator Durbin said that he has introduced language into an amendment on a financial reform bill that would put a ceiling on interest rates.  He is quoted as saying, “I tried to take a number I considered to be so high that even the biggest banks couldn’t argue with it.  I said we couldn’t have an interest rate over 36 percent. . . . I think we ought to have an absolute limit.” 

Please tell me that I’m dreaming. 

After I caught my breath, I sat down to think about interest rates a bit.  That’s not a fun thing to do on an early Monday morning.  For starters, any discussion of interest rates leads directly into the abyss of laws covering the subject.  And, of course, laws covering interest rates can be complicated state or federal ones, depending.  Suffice it to say that I am not a lawyer and immediately disclaim anything here that might be construed as legal advice.  I neither offer nor suggest any legal advice, and recommend that you consult with a licensed attorney if you need or want such services. 

Now, back to just after my morning orange juice.  On the face of it, I think it fair to say that, in the United States, interest rates can vary from ZERO to, say, (um, Senator Durbin) 36%.  If you toss into the interest rate computations the rates of the pay-day loan outfits, pawn shops, and the title loan gang, you most assuredly have situations where the APY is higher than 36%.   Whatever the Senator’s legislative intent, to offer interest rate ceiling legislation to which no bank would object is, to put it mildly, surely usurping the voices of his constituents.  I mean, who in the world can conceive such a thing other than someone almost incomprehensibly out-of touch.  To me, his premise is just staggering. 

What if one begins the discussion of interest rates with the premise of “fairness” and not the premise that “no bank can to object to a ceiling of 36%”?  How then does the dialogue proceed if reasonable people of all ilk can begin with an attempt to decide what a fair interest rate might mean?  Might that be the place to start a discussion?  Surely that is a better alternative than what the Senate Majority Whip has pulled from his hollow hat? 

So, what is fair?  I doubt that there is an answer to that.  Maybe “fair” is a just place to start a discussion.  Or maybe, it’s just a concept to keep in the background when discussing rate ceilings because, after all, aren’t loan arrangements entered into voluntarily?  Well, of course, they are; but that spirit of volunteerism can lead to bad places. 

When I was a much younger man, I picked up a copy of a personal financial management sort of book.  I do not recall the author.  I seriously doubt that it was a best-seller.  I recall it being a patronizing thing – warning one away from the financial dangers-that-be out there in the cruel world.  At the time, I imagined that this book was written by a very boring person with a very boring life – a classic nerd, if you will.  However, there was one bit of advice he gave which jumped off the page and seemed directly aimed at me.  He wrote, “Don’t ever buy a consumable item with anything other than cash.  That way, you’ll never end up paying for something long after it has been used.”   That made perfect sense to me.   Maybe you, too? 

Don’t we all wish that we all followed that advice?  Well, no.  Life wouldn’t have been nearly as much fun – or dreadful, at times.  Let’s just move on here and admit that we are a consumer-driven society in a consumer-driven world and what makes the wheels of innovation and progress go round is the ability for the consumer to borrow.  Take away credit, the wheels come off, the cart crashes, and we all are trapped under a big immoveable object with total loss of all mass and momentum.  The United States has about 2.5 trillion in outstanding consumer debt.  Consider, too, that Americans charge over 2 trillion dollars per year on the over 180,000,000 million credit cards out there.  Whew! that’s a lot of plastic.  Take that away and I don’t think anyone knows what would happen other than total economic collapse. 

So, we’re all stuck with credit.  Consumers are stuck with the lenders.  The lenders are stuck with the legislators.  And the legislators are stuck with the consumers.   That is, the legislators are supposed to be stuck with the consumers.  Unfortunately, Senator Durbin, it looks like we’re stuck with you instead of the other way around.  Maybe something is amiss here. 

Let’s discuss real interest rate ceilings for a bit.  As a citizen of Illinois, if I were to loan money to a friend or a neighbor, or some other entity, I would be subject to my state’s usury laws.  According to information provided at http://www.usurylaw.com/state/ the interest rate ceiling that I would be permitted to charge is 9%.   If I were to charge more than that, I would be violating the State law.  Further, if I engaged in practices in which I had established a pattern of charging more than twice my State’s limit of 9%, in other words 18%, I might be subject to Federal RICO statutes, and that might very well be a felony.  In street vernacular, I would be considered a loan shark if I charged more than 18% to my neighbor or friend. 

Ah, but Senator Durbin wants a Federal law for financial institutions, apparently of all types, to be subject to an interest rate ceiling of double what would be a Federal felony in his own state for a person or other entity regulated by his own State’s usury laws.  I read that the Illinois usury laws also are applicable to amounts owed in civil judgments.  But the Senator wants to legislate by Federal law an interest rate ceiling for financial institutions that is 4 times the amount permitted by his own state for civil judgments.  Apples and oranges, the Senator might say.  I say not. 

I have my own hollow hat and my idea on what is a fair interest rate ceiling.  I think the big banks might not like my number, and might want to argue with it. 

My number is 12% APY 

What do you think? 

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Senator Durbin . . . Your Answer, Please?

In the fall of 2005, after the Senate Judiciary Committee had approved John Robert’s nomination to the Supreme Court by a vote of 13 to 5,  I became curious as to why the senior Senator from my State of Illinois had cast one of the “no” votes.  I decided to send a letter of inquiry to the Senator via his website to find out.  I was 55 years old at the time with this being my first letter to any elected official about any subject. 

I had watched a considerable part of the confirmation hearing and thought that Roberts had handled the process quite well.  It was fairly obvious that he was quite a conservative nominee, but I did not think that should matter much.  He was as qualified as anyone in the United States, even though he was fairly young for a Supreme Court nominee.    Somewhat naively, I believed that the vote for his approval, whether in committee or in the full Senate should be based on merit and temperament rather than political drift.   

 I carefully composed my letter and hit the “send” key.   I received a timely, well-written response from the Office of the Senator, and it was more than I had expected.  Although the letter had the readability and content of a plain-vanilla reply written for general purposes, it was quite thoughtful and seemed genuine.  Actually, I was pleased to have received any response at all.   Even though I suspected that the letter had been written by a junior staffer, it seemed to have been well-reasoned and, possibly, honed by the Senator himself prior to distribution.   All and all, I was satisfied with his response even though I thought his vote went the wrong way.  4  years later, I am not so sure.  Maybe I made a rookie mistake.  Who knows?  I suspect that it is too early to tell.

It took quite awhile before I wrote another letter.  I drafted the next one to Senator Durbin several months ago.  I don’t recall much of the specific language, but the gist of my letter centered around the Senator’s whereabouts in the health care debate.  I had read his statements on his website, but I was curious as to why his public profile on the topic was so low.    This was the period when Baucus and his gang of an indeterminate number ran the health care show (seems like eons ago, doesn’t it?).  Was Senator Durbin, as Majority Whip, staying out-of-the-way until final vote tally time, getting ready for the big-whip, or what?  Anyway, I thought that I might make a rather general inquiry as to his involvement in the process.

It was about 3 weeks later that I received a reply.  OK, a little tardy, but it was a response.   It was also, disappointingly, quite general and bland.  I remember thinking that it wasn’t much better than a grammatically correct high school term paper.  I gave it a grade of C+.  It would have been a B- had it been delivered a little more promptly.  The letter had not really delivered anything other than the most general of platitudes.  Disgusted with this response, I figured that I was done writing letters to my Senator – that is, until I read a short piece by the economist, Paul Krugman.

This is the piece that inspired me to write letter # 3 to Senator Durbin:  http://krugman.blogs.nytimes.com/2010/02/05/the-senate-becomes-a-polish-joke/

My letter of inquiry was fired off almost the instant that I had finished reading the Krugman article.  I wanted to know what Senator Durbin’s opinion was, if he had one, on the Krugman piece.  Was the Senate indeed becoming a joke where, like in 17th century Poland, any Senator could stand up and scream, “No,” and the whole process would come to a halt?  It seemed a fair enough question.  After all, this was a question from a liberal citizen from Springfield, Illinois, to a liberal Senator from Springfield, Illinois (I believe we even had the same barber in the 1970’s) about a piece written by a liberal economist?  This would just be three ordinary, middle-age guys comparing notes, right?  Wrong.

It’s been about 5 weeks now, and not a peep.  Maybe the interns are on break . . . . 

5 years – 3 letters – 2 replies – 1 still in draft form??

(Update May 12, 2010 : A full 2 months since my original inquiry and still no reply.  I think it’s safe to assume that I can stop waiting.  Not a bit surprised though.  I believe that I can safely infer that the Senator’s Office only replies to mail inquiries that are convenient or self-serving.)