Bankruptcy

Amendment to Repeal Marquette

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.

Full post as published by Credit Slips on May 06, 2010 (boomark / email).