Category: Finance

Financial Regulation: Credit card amendment

Disclaimer: I worked for Sheldon Whitehouse when he was Attorney General here in Rhode Island.

He is now one of the U.S. Senators to Rhode Island. He’s turned out to be pretty good as a Senator. I’m loving this latest amendment to the Financial Regulation bill.

What most people don’t know is that many states still have usury laws on the books. So I can see where Senator Whitehouse is going with this. There should be an 18% cap on rates. When they rise as high as 30% that’s just outright robbery let alone usury.

Very encouraging to see them fixing bad law. If you’re not up on the whole Marquette thing it can be summed up as follows.

Banks argued that they had customers in every state and to have to follow the rules of each individual state would be too cumbersome. Now you have to remember that in the 1970’s computing technology wasn’t so widespread. In fact many banks still did a lot of entries on paper, I remember it clearly.

So they petitioned the courts to say that the terms of the contracts could be based in their home states as opposed to the state where the card holder resided.

But it is now the 21st century. Computers are infinitely more advanced than they were even in the early 1980’s when it was still text based interfaces and no point-click or advanced and freely available database products.

Now it is literally a piece of cake so the banks have no excuse other than the obvious greed.

And if I might ask Senator Whitehouse to take up another hot button issue, I’d ask him to take up the student loan debacle. First of all, properly fund the Pell grant program. It’s bizarre. When I made less money I never qualified but when I started making decent money I qualified for Pell grants. Strange.

But on to student loans. If you get in a jam like no being able to find a job etc. you can put your loans into deferment or forbearance. When you do that they capitalize the interest. In other words the interest calculate becomes part of the principal balance of your student loan.

E.g. Suppose you have $50,000 in student loan debt. Right now it runs about 5% per year in interest so to simplify, $2,500 in interest. You file the deferment or forbearance and that interest gets lumped into the loan. Now that loan principle becomes $52,500 and interest on that is now $2,625. Lets say you go one more year. It becomes $55,125 and interest on that becomes $2,756.25.

Now you know how some people can end up half a million in debt from student loans. It is ridiculous.

So the next thing we should tackle is student loans.