South Dakota a Favorite State for Credit Card Companies

Do you ever wonder why your Citibank credit card bill comes from South Dakota, and your payment goes there as well, when you know that Citibank is headquartered in New York?  It is because of a combination of federal law and 50 different state laws that allow a bank in New York to use a South Dakota address to bill a customer in California.

Usury Laws
Many states have a usury law which limits the interest rate that a company may charge. 
Most of these laws capped interest rates at 18%.  However, some states, such as South Dakota, do not have a usury law, allowing in-state businesses to charge as much interest as they want.

Congress has the power to regulate interstate commerce, which includes regulating nationally chartered banks which do business in more than one state.  In the Supreme Court case Marquette v. First Omaha Service Corp. in 1978 the Court ruled that nationally chartered banks do not have to follow state law in which they do business, but only the law of the state in which the company is incorporated.  Because state usury laws were not uniform this rendered all of them irrelevant as credit card companies picked up and moved to the states that allowed them to charge the highest interest rates.

After the 1978 ruling only national banks were exempt.  If you banked with a bank which only did business in your state you were protected by your state's law.  But a federal law now exempts state banks as well.

Usury Deregulation
The Gramm-Leach-Bliley Financial Modernization Act was passed in 1999.  This law created more regulation on banks because it required financial services companies to better protect their customer’s confidential information.  On a trade off though it lessened the control that state banking regulators had over banks that only operated in their state.  The law allows state chartered banks to charge interest rates equal to those charged by national banks operating in their state.  Thus even if you have a credit card with First National Bank of California, which only has one branch office, you will still be charged the highest interest rate allowed by any state.

The only protection that consumers now have is what is listed in the credit agreement that the customer signs before using the card.  However, most agreements are tilted heavily to the issuer and most customers rarely read them to begin with.  For customers that are hit with late payment penalties they can see their interest rates rise to as much as 32%.

Another problem with deregulation was that credit issuers were not required to set a manageable minimum payment.  Most credit cards have slowly lowered their required minimum monthly payment from around 5% of the balance to only 2%.  This encourages their customers to pay less each month, which translates into more time to pay off the balance.  If a customer has a balance of $5000 and only pays 2% of the balance each month at an interest rate of 18% it will take 46 years and interest costs of over $13,000 to pay it off.

Renewed Regulation
Deregulation was intended to create, and did create more credit choices for consumers.  The removal of state-imposed interest rate limits allowed credit card companies to offer credit to customers all over the country and not just in their home state.  Now several major lenders are having problems with defaulted accounts, mainly because the interest payments on those accounts were so high.  Because of the credit collapse the Treasury Department recently proposed new legislation that will change how credit is regulated in the country.