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Repealing Marquette

posted by Bob Lawless

Senator Sheldon Whitehouse has introduced, with Senator Dick Durbin, the Empowering States' Right to Protect Consumers Act of 2009 (S. 255). The statute would repeal the thirty-one year old Marquette decision, which was the United States Supreme Court ruling that held federal law preempted state law regulating interest rates. A later decision in 1996 (Smiley v. Citibank) expanded the scope of federal preemption, holding states also lacked the power to regulate the fees charged on credit cards, and the bill would repeal Smiley as well.

Marquette
effectively deregulated most consumer interest rates and led to the expansion of consumer borrowing for the past thirty years. After the Smiley decision, bank fees started to climb. Much of the "gotcha" marketing mentality from the credit card industry can be attributed to the freedom Smiley gave banks to exploit credit card fees as a revenue stream.

Some persons think interest rate and fee caps are bad idea. Fair enough. The Whitehouse bill, however, is not an interest rate cap. It merely returns the power to the states to regulate consumer lending to their citizens and harnesses the states as "laboratories of democracy" (as the saying goes). Let the states experiment with interest rate and fee caps, and we will find the right balance between exploitative market practices and overly restrictive government regulation.

Comments

Could we take that further? Maybe it could leave the door open to allow states to force Mortgage Companies to modify Mortgage Contracts? I know we regulate certain types of mortgages. ie.. second mortgages (fairly new here in Texas) But I don't know how much retroactive powers the states have over mortgages. Maybe the states could say "you know these subprime ARMS are really hurting our bottom line, lets change them". Guess I should read it before asking.....????

Opps... Guess not.....:(

Or, put differently, the bill closes off a regulatory arbitrage loophole that the Supreme Court inadvertently opened up when interpreting the sorely outdated 1863 National Bank Act.

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