What is the main purpose of a usury law? Be specific. 4:30
“Usury is the unlawful act of charging interest on a
debt at a rate greater than what is permitted under any applicable law or
exemption from a law” (Usury Law). A usury law is used to regulate this by
capping the amount interest that can be charged on loans. They are used to
prevent companies from putting an incredibly high interest rates on loans so
that the bower can never pay off their loans. They are there to protect the
consumer from being over charged from interest. They are set by the state, but
not every state has usury laws.
Why did South Dakota decide to eliminate its cap on interest rates? 4:30,
South Dakota decided to drop their cap on interest rates
because banks weren’t loaning out money. When the recession hit South Dakota,
it hit hard. Times were very tough and banks were issuing very few loans. The
state had very strict laws on interest rate, these laws were making it very
difficult for banks to loan out money. They “eliminated these strict usury laws
to raise the ceilings on usury to get capital in South Dakota” (Janklow PBS
article). The elimination of usury laws allowed banks to raise interest rates
and stat loaning out money again.
Why were the usury laws strangling the banking industry? Be specific.
usury laws were strangling the banking industry because they couldn’t loan out
money. It was too expensive and there wasn’t a big enough return to warrant
loans. Interest rates were skyrocketing, while the usury laws were holding
consumer interest rates down. Forcing
the banks to pay more out than they were receiving in interest.
Why did Citibank move to South Dakota? 5:00
Citibank was based in New York, which had usury laws that
prohibited banks from charging more than 12 percent on loans. They were loaning
money out at 12 percent while they had to pay 20 percent on interest. They
could not afford to operate in those situations. Walter Wriston former chairman
of Citibank said that they “had a credit card division that was hemorrhaging
money” (Wriston PBS article). In 1981 they moved out to South Dakota to advance
its credit card operation, because South Dakota had removed its usury laws.
In the Citibank example, how did Citi use existing laws to alter its business
Citibank was hemorrhaging money under the interest rate
laws in New York. Their credit card business was extremely unprofitable. Having
realized that there was no chance for success under the current usury laws in
New York they decide to move their headquarters. When they moved their
headquarters to South Dakota where the usury laws had been removed, they
altered their business model to focus more on credit cards. This turned out to
be a smart decision, considering that this choice saved the business. Citibank’s
credit card branch made an incredible profit after the change in location.
6 What was the underlying
basis of the Marquette Bank decision?
The Marquette Bank decision was a Supreme Court decision that
allowed a bank to apply its interest rate to any other state. For example, “if South
Dakota had a 25 percent ceiling, then you could charge 25 percent, even to a
loan in Florida” (Janklow PBS article). Citibank was using the high interest
rate allowed in South Dakota and applying it to other states with the Marquette
decision. South Dakota’s removal of its usury laws and the Marquette decision
created the perfect situation for Citibank. This decision is what allowed Citibank
to make a profit off credit cards. It also set South Dakota as the credit card
capital of America.