1What is the main purpose of a usury law? Be specific. 4:30 “Usury is the unlawful act of charging interest on adebt at a rate greater than what is permitted under any applicable law orexemption from a law” (Usury Law). A usury law is used to regulate this bycapping the amount interest that can be charged on loans.
They are used toprevent companies from putting an incredibly high interest rates on loans sothat the bower can never pay off their loans. They are there to protect theconsumer from being over charged from interest. They are set by the state, butnot every state has usury laws.2Why did South Dakota decide to eliminate its cap on interest rates? 4:30, South Dakota decided to drop their cap on interest ratesbecause 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. Thestate had very strict laws on interest rate, these laws were making it verydifficult for banks to loan out money. They “eliminated these strict usury lawsto raise the ceilings on usury to get capital in South Dakota” (Janklow PBSarticle). The elimination of usury laws allowed banks to raise interest ratesand stat loaning out money again. 3Why were the usury laws strangling the banking industry? Be specific.
Theusury laws were strangling the banking industry because they couldn’t loan outmoney. It was too expensive and there wasn’t a big enough return to warrantloans. Interest rates were skyrocketing, while the usury laws were holdingconsumer interest rates down. Forcingthe banks to pay more out than they were receiving in interest.
4Why did Citibank move to South Dakota? 5:00 Citibank was based in New York, which had usury laws thatprohibited banks from charging more than 12 percent on loans. They were loaningmoney out at 12 percent while they had to pay 20 percent on interest. Theycould not afford to operate in those situations. Walter Wriston former chairmanof Citibank said that they “had a credit card division that was hemorrhagingmoney” (Wriston PBS article). In 1981 they moved out to South Dakota to advanceits credit card operation, because South Dakota had removed its usury laws. 5In the Citibank example, how did Citi use existing laws to alter its businessmode? Citibank was hemorrhaging money under the interest ratelaws in New York. Their credit card business was extremely unprofitable. Havingrealized that there was no chance for success under the current usury laws inNew York they decide to move their headquarters.
When they moved theirheadquarters to South Dakota where the usury laws had been removed, theyaltered their business model to focus more on credit cards. This turned out tobe a smart decision, considering that this choice saved the business. Citibank’scredit card branch made an incredible profit after the change in location.
6 What was the underlyingbasis of the Marquette Bank decision? 6:30 The Marquette Bank decision was a Supreme Court decision thatallowed a bank to apply its interest rate to any other state. For example, “if SouthDakota had a 25 percent ceiling, then you could charge 25 percent, even to aloan in Florida” (Janklow PBS article). Citibank was using the high interestrate allowed in South Dakota and applying it to other states with the Marquettedecision. South Dakota’s removal of its usury laws and the Marquette decisioncreated the perfect situation for Citibank. This decision is what allowed Citibankto make a profit off credit cards.
It also set South Dakota as the credit cardcapital of America.