Loan Shark or Loan Officer
A Humble Opinion by Mel Goodman:
A loan shark is a person (usually mob connected) that loans money at interest rates exceeding the interest rate allowed in a given state. These amoral, unethical gentlemen make their own rules and levy late penalties as they wish without concern for the debtors' health or well-being. These ‘businessmen' are guilty of the crime of usury; a moral and ethical crime that targets the new middleclass, the working poor.
In my humble opinion there is very little difference between the despicable loan shark and my friendly loan officer at the neighborhood bank. Allow me explain myself.
Wikepedia defines Usury: (from the Latin usus meaning "used") was defined originally as charging a fee for the use of money.
Usury is strictly forbidden by most religions, (Judaism, Islam, Christianity, etc…) and has been denounced for the past 3,000 years by almost every spiritual leader and philosopher of note, Plato, Aristotle, Cato, Cicero, Seneca, Plutarch, Aquinas, Jesus, Muhammad and Moses to name just a few.
Dante himself commented on the subject of usury saying:
“To live without labour is denounced as unnatural, placing usurers in the same circle of hell as the inhabitants of Sodom and other practisers of unnatural vice”
The Church was against the practice of usury (charging interest) as it was considered unearned income. In 1515 the Church further defined usury in its doctrine of ‘Just Price':
“This is the proper interpretation of usury when gain is sought to be acquired from the use of a thing, not in itself fruitful (such as a flock or a field) without labour, expense or risk on the part of the lender.”
It wasn't until ‘modern times' that the practice became acceptable; a time when it was discovered that profits need not be the result of initiative, enterprise and efficiency, but in the case of interest, profit is guaranteed without risk on the part of the lender, in other words, without having to work for it. It has become a time when the love of money is the end in itself and not how you use that money. Perhaps that's what is meant by ‘the root of all evil'.
Our burgeoning economy accepted the philosophy of charging interest on moneys borrowed and laws were enacted to protect the consumer. Each state held responsibility for establishing the allowable interest rates charged within that state. Each interest rate charged was based on a percentage above the Federal Reserve's Discount Rate.
What is a discount rate and just who or what is this all powerful Federal Reserve?
The Federal Reserve was established by President Woodrow Wilson on December 22, 1913. It became the Central Bank of the United States, incorporating 12 branch offices of the Federal Reserve Bank, all national banks, state chartered commercial banks and some trust companies.
It is run by the Fed under a chairman and seven committee members (or ‘governors') who are all appointed by the US President and confirmed by the Senate. Although the board is appointed by the President, the whole system is relatively independent of the US government as the decisions of the Fed do not have to be ratified by the President or anyone else in the executive branch of the United States Government. Essentially, the Federal Reserve makes and lives by its own rules. The Chairman and Vice Chairman serve a term of 4 years while the full term for Governorship is 14 years. You can review the Governors' bios here.
The Federal Reserve Board controls the United States economy by raising and lowering short term interest rates and regulating the money supply. They print the money, fix the discount rate and issue government bonds. Congress looks over its shoulder but has no hand in forming or implementing policy.
The Federal Discount Rate is the interest rate at which banks can borrow money from the Federal Reserve. This is generally a last resort as banks usually borrow from other banks. The Federal Reserve's board of governors set a minimum requirement that banks must maintain in monetary reserves. Banks that fall below the reserve amount borrow money from the Fed to correct their shortage. In addition, allowable interest rates are pegged at percentage points over the Federal Discount Rate.
You can view your states allowable interest rates at: State Interest Rates & Usury Limits
So if there are laws in place that limit the amount of interest charged, why are we paying these exorbitantly high interest rates on our credit cards?
Allow me to digress.
In 1958 the Bank of America launched a novel way of providing revolving consumer credit, the Diner's Club credit card. It wasn't long before the rest of the large banks followed suit making consumer credit cards available to all that had a bank account. Initially, credit cards were well accepted by an American public that had recently returned from the Second World War and were starting families all over the nation. We didn't want to wait around to buy the new Frigidaire.
In their zeal to expand the credit card market share, the banks inadvertently created a decade of chaos. Banks would simply mail credit cards to anyone breathing, their children and at times even their pets. Many were intercepted by thieves prompting housewives throughout the country to faint when in receipt of a monthly bill for thousands of dollars on cards they never received.
By the mid-sixties Congressional hearings were being held where some influential critics demanded that credit cards be outlawed. This worried the banks. Something had to be done to bolster the banks' flagging profit margins.
That ‘something' occurred in 1978 when Visa and Mastercard linked a nationwide network of merchants. Things were going well for a time but the inflation of the eighties began to erode bank profits. The bankers scurried off to their local state governments requesting a raise or out and out elimination of the state usury rate, there-bye allowing the banks to charge interest rates necessary to maintain a healthy profit.
The bankers' pleas were met with limited success as New York based Citibank was to find out when the government of the time refused to raise the ceiling on usury rates. Citibank threatened to take its 3,000 credit card department employees to another state if New York refused to capitulate.
Then, in a little ballyhooed Supreme Court ruling, Marquette vs. First Omaha Service Corp., it became possible for national banks to charge the interest rates of the state in which the credit card company was registered, and apply those interest rates in any state they wished.
In a stroke of genius Citibank moved its entire credit card operations to South Dakota where the usury laws were far more exploitable. Citibank was now able to ignore other state's constitutions and charge the South Dakota allowable interest rate wherever they pleased. In exchange, South Dakota provided jobs for its citizens and additional tax revenue to the state coffers. A win, win, one could say, unless you happened to be a consumer. A year later Delaware, not wanting top be left behind, lifted the ceiling on usury and captured the banking businesses of Chase, Manufacturer's Hanover, and Chemical; all relocating their credit card operations to Delaware.
According to the American Bankers Association, 21 states and the District of Columbia have interest-rate caps for credit cards. The other 29 states do not. States with lender-friendly credit laws include Georgia, Illinois, Nebraska, Nevada, Rhode Island and Utah.
State Interest Rate Caps: State Interest Rates & Usury Limits
The exception to the rule was the state of Arkansas. For more than 125 years the state's constitution had capped the rate of usury at 5 percent above the federal discount rate. Today Arkansas offers some of the lowest credit card rates in the country.
As all good things must come to pass, the US Congress passed the Gramm-Leach-Bliley Financial Modernization Act in 1999. A section of the act allows banks to charge interest rates equal to those charged by any other bank operating in their state. Gramm-Leach-Bliley Financial Modernization Act
It will be interesting to see how the fine citizens of Arkansas fair under this new regime of fair business practices.
Who do these usury rates benefit? It becomes ultimately clear when one looks at the yearly income of your typical bank CEO. Based on the bank's profitability it is common for the head of a bank to justify making in excess of $100,000,000.00 per year. Based on an 8 hour day, 20 days per month, our bank CEO is paying himself $52,083.33 per hour! When the average yearly income for a family of four is about the same; does it not seem a tad excessive? Does it seem a tad unethical?
Wikepedia goes on to say that “the primary ethical argument in defense of usury has been the argument of liberty against the “restraint of trade” (since the borrower has voluntarily entered into the usury contract)”.
True enough but the cardholders that are able to pay off the card each month are not profitable to the credit card companies. It's the low income consumer that gets caught funding the lavish incomes of the few. ‘The rich get richer and the poor get poorer', is a truism today.
And still the banks aren't satisfied. They engage in age old scams like ‘bait and switch' where they offer to provide you with a low interest credit card and not tell you that they can increase the advertised rate any time, for any reason. It's the middle class trap, it's people like you and me that are caught within the usury trap.
Lots of us can barely keep our heads above water. Unemployment is high, good paying jobs are scarce, pensions, health care and education are becoming so expensive they're the things that dreams are made of. Because of high interest rates the poor have to sweat doubly so that the rich might live on the interest.
The fact is, for the average family to survive, they are forced to borrow. The fact is, we are collectively $2 trillion dollars in debt, with record numbers of families needing to declare bankruptcy. To make matters worse, President Bush recently signed into law a new bankruptcy act that makes it more costly if not impossible to declare personal bankruptcy. Changes to the bankruptcy act
Recently our politicians have taken a liking to discussing “values” and “morals” when addressing the nation but when Congress is faced with a bill that would end the predatory nature of “bait and switch” credit card scams, the millions of dollars in campaign contributions from banks and credit card companies spoke louder than those of the American consumer. Its still business as usual and the common man continues to suffer.
Not satisfied with the loop holes allowing banks to charge outrageous interest rates regardless of a particular state's constitution, they found yet another source of revenue, annual fees. Now even the best of their customers pay a fee! When the customer avoids interest rates by paying their credit cards off on time, they had become unprofitable “transactors”. Now with ‘fee' implementation, the banks can extract money even from the best of their customers.
The next assault on the average American came disguised as a gift. Minimum payments were cut from 5% to 2%. This allowed the credit card companies to increase your line of credit and yet charge the same minimum payment. Following closely behind this magnanimous gesture began a steady increase in late penalty fees. Penalty fees now amount to $12 billion per year in bank revenue. It's unfair.
Just when you think that you've seen enough, the
banks and mortgage companies have concocted the
‘interest only loan'. In San Diego, over 70% of
the registered mortgages were interest only. This is
another mine field for consumers as any increase in
interest for consumer or mortgage loans will land many in
the most stressful of situations, foreclosure.
I have to agree with a recent editorial
from a Vermont Congressman published 12/1/2004 in the North
Jersey Record:
“Loan-sharking is an odious practice whether it is performed by street corner thugs or the CEOs of large banks. Charging economically vulnerable Americans outrageous interest rates and fees is simply not acceptable and, amid all of the recent political discussion over "values," this certainly does not constitute "moral" behavior. The time is long overdue for Congress and the White House to stand up for American consumers, take on the modern-day loan sharks and end the credit card scam.”
We of the working poor have been characterized as egotistical, arrogant, greedy and simply financially stupid to find ourselves mired in debt, and yet the banks and other lending institutions spend fortunes each year in their ‘full steam ahead' attempt to convince us to borrow more. Perhaps we are only guilty of believing in the self serving rhetoric we are deluged with each day. The time for change is upon us. Let Congress and the White House hear your voice, together we can make a change for the benefit of all.
Find out how your congressperson voted on the Bankruptcy Abuse Prevention Act.