A looming threat to Minnesota credit consumers

Imagine going back in time to the 1950s and ‘60s when cash-strapped families were unable to obtain bank credit and were at the mercy of the likes of pawnbrokers and loan sharks as well as personal-relationship-based local store credit to make ends meet.

It sounds absurd, but that is the position into which some Minnesota lawmakers are thinking about thrusting our state’s most economically vulnerable families today.

In the late 1970s, the American economy was transformed; unprecedented competition among banks put the convenience of credit cards and other credit products into the hands of millions of people who previously were ineligible for them and had to rely on more expensive and risky credit options.

Why? Thanks to a unanimous 1978 decision by the U.S. Supreme Court in Marquette Nat’l Bank of Minneapolis v. First of Omaha Serv. Corp., authored by liberal icon Justice William Brennan, banks holding a “national charter” were to be governed by the interest rate caps of the states in which they were based instead of the state in which the consumers lived. Therefore, the nationally chartered banks started offering very attractive terms across state lines.

Moreover, in response to the Supreme Court’s decision, the U.S. Congress passed a bill, signed into law by President Jimmy Carter, called the Depository Institutions and Monetary Control Act of 1980 (known as DIDMCA or DIDA), which allowed banks chartered under state law to have the same right to “export” their home-state interest rates as the national banks did. This enabled state-chartered banks to compete on an equal playing field with massive, nationally chartered banks like Wells Fargo, Citibank, and Capital One.

The result of DIDMCA’s passage was vibrant competition among all banks — nationally and state-chartered — to provide more and more attractive terms on credit and to provide more credit options, as well as to provide credit to more and more people. This especially benefited millions of previously credit-deprived and underbanked customers who were brought out of the margins and into the mainstream credit community. This helped fuel the economic expansion of the 1980s and beyond.

Unfortunately, in passing DIDMCA, Congress included a provision that would allow state legislatures to opt out of the law. At first, Colorado, Iowa, Maine, Massachusetts, Nebraska, North Carolina, Puerto Rico and Wisconsin all opted out. Over time, however, all but Iowa and Puerto Rico rescinded their opt-out laws after seeing the benefits to consumers in states like Minnesota.

Yet this year, State Reps. Carlie Kotyza-Witthuhn of Eden Prairie, Zack Stephenson of Coon Rapids and Leon Lillie of North St. Paul have filed a bill (House File 3680), which, if passed into law, would force Minnesota to opt out of DIDMCA and become an anomaly like Iowa. The idea is baffling.

Iowa operates in a pre-1980s market, which puts Iowa consumers at a disadvantage. It also puts Iowa state banks at a disadvantage compared to the massive, impersonal, national-chartered banks. It’s these, the largest banks in the nation, that are charging the highest fees, and they’d be exempt from Minnesota H.F. 3680 because they would continue to be governed by the Supreme Court’s 1978 ruling.

Similarly, in addition to the threat that a DIDMCA opt-out would pose for Minnesota consumers, it also would put Minnesota state-chartered banks at a disadvantage compared with nationally chartered banks, which include, ironically, the Minnesota-based behemoth U.S. Bank.

Of course, the impact of an opt-out would be negligible to Minnesota’s more financially well-off consumers. Where the impact would be felt most acutely would be among Minnesota’s marginalized citizens — people who are not highly regarded or well served by much of the financial services industry.

It’s important to understand:

32% of consumers have non-prime credit scores — that’s 1.8 million Minnesotans.

 20% of Minnesotans have difficulty paying ordinary household expenses.

17% of Minnesotans have outstanding credit card debt that exceeds 75% of their total credit limit.

These are the consumers who would be harmed by H.F. 3680 — Minnesotans who can’t get a loan from a bank and who struggle to access the credit they need.

Less well-to-do Minnesotans should have a myriad of credit options just like well-off Americans do to help them weather financial storms and build a better future for their families.

Why would any lawmaker want to abandon vulnerable Minnesotans in a veritable credit desert like Iowa? Everyone who cares about the economic well-being of low-income, minority, young and other marginalized Minnesotans should oppose a DIDMCA opt-out.

Kent Kaiser, Ph.D., is the secretary/treasurer of the Domestic Policy Caucus, which can be found at www.domesticpolicycaucus.com.

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