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Amendment to Repeal Marquette

posted by Bob Lawless

Senator Sheldon Whitehouse is sponsoring an amendment to the financial regulation bill that would undo most of the damage from the Marquette National Bank decision. In Marquette, the Supreme Court ruled the National Bank Act preempted state interest rate regulation. Thus, a national bank in South Dakota lending to a consumer in California gets to follow the relatively lax interest rate laws of South Dakota. No matter that the high-rate loan might cause financial hardship for families in California--that's not South Dakota's problem.

I've long thought that overruling Marquette would be a wise move. The decision laid the groundwork for the the consumer credit culture we have today and is arguably one of the most momentous (but often overlooked) Supreme Court decisions of the last fifty years. Also, as an interpretation of a technical provision a 110-year old statute, Marquette might also win the prize for the Supreme Court decision with the most unintended consequences.

If you think interest-rate regulation is a bad idea, nothing in the Whitehouse amendment should bother you. It merely shifts the power to make decisions about interest-rate caps to the states and away from Washington bank regulators. California can enact laws appropriate for the conditions there, just like South Dakota can enact laws appropriate for its citizens. The Whitehouse amendment does not take any position on whether the appropriate law is a high cap, a low cap, or no cap at all. California or South Dakota or Delaware or any other state just would no longer be able to export their interest-rate laws to other states. It would allow the states to be laboratories of democracy, as the saying goes, and experiment with interest rate regulation. Also, it should be noted that the amendment would not apply to interest rates on home mortgages.

The predictable response from the banking industry will be that they cannot possibly operate and be subject to 50 different state laws. In the information technology age, however, compliance with different state interest rate statutes should be a trivial matter of computer programming. Also, the banking industry (and many other industries) capably navigate a whole thicket of laws on core state matters such as employment, taxation, and property. The Whitehouse Amendment deserves more attention than it is getting.

UPDATE: The text of the amendment is here, and an explanation of the amendment from Senator Whitehouse's office is here.


I used to do computer programming in the financial industry, and was amazed at some of the complicated things we did for various compliance reasons. This, as you say, would be nothing.

There are millions of credit cards out there in the stream of commerce. Yet, the credit card companies do not seem to have a problem calculating different interest rates for different consumers based upon credit worthiness. Moreover, the credit card companies charge different interest rates to the same credit card account based upon the transaction (purchase, cash advance, promotion). I would not think that calculating fifty different interest rates for the fifty different states would be that difficult.

Corinne, that is a good point. If the credit card industry currently can differentiate pricing across so many cards and across so many characteristics of their holders, it surely would be trivial to differentiate based on the state of residence.

dWj, thanks for the perspective of a former industry insider. I really can't understand how the banking industry would be prejudiced by regulation across 50 states. I think it is the regulation that bothers them, not the 50-state part of it.

You have to remember that the burden of complying with 50 state laws is always unreasonable--unless you are talking about the unreasonable burden of complying with the out-of-touch mandarins in Washington DC.

Industry trots out both arguments, as they are convenient. There is also "interferes with competitive market forces," used alternatively with "natural monopoly" or "destructive competition."

The weird thing about this ducktalking is that it works.

There is a lack of intellectual lack of coherence in a party that federalizes insurance regulation and defederalizes financial regulation.

I have poseted several times that we would be better off abandoning the disclosure based regulation of consumer finance, including but not limited to the consumer financial protection bureau idea, in favor of a national usury law.

Although Whitehouse's amendment would permit state level usury regulation it does not do so as a substitute for other regulations but merely enables add-on regulation. I cannot conceive that having both types of regulation at once is the optimal solution.

For that reason I would hope it is rejected.

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