Infuriated legislators today began drafting a package of tough banking regulation bills in response to a surprise ruling by a state judge that gives federally insured banks in Maryland authority to charge 33 percent interest on credit card balances, compared to the 18 percent ceiling established by the General Assembly last year.
The ruling by Baltimore Circuit Court Judge Marshall A. Levin allowing banks to nearly double their credit card interest rates prompted widespread anger and fear here that the state had been stripped of its traditional powers by the court and the federal government.
Levin's ruling, which in effect removes the state interest rate ceiling, is believed to be the first state application of the 1980 bank deregulation act championed by the Carter administration. Levin ruled that national banks are allowed under an older law to charge as much interest as small loan companies on loans up to $6,000, and that the new deregulation act supplies that rule to federally insured state banks as well.
Since small loan companies in Maryland can charge 33 percent on the first $500 of a loan and 24 percent on the next $200, federally insured state and national banks, according to Levin's ruling, should be allowed to charge the same rates on credit card balances.
The legislature has long held the power to control interest rates in state banks, but now its leaders fear that the federal deregulation act and the court ruling have deeply undercut the state's power to control banking activity within its borders
"This has such magnitude that it affects more people than any piece of legislation I've ever seen -- other than perhaps a war," Sen. Harry McGuirk (D-Baltimore) intoned ominously as he discussed the ruling with members of the Senate Economic Affairs Committee, which he chairs.
Speaker of the House Benjamin Cardin (D-Baltimore) said legislative leaders may support a package of banking regulation bills in an attempt to restore state control over credit card interest rates and banks in general.
"This has us aggravated," Cardin said. "We feel somewhat unable to cope with problems we feel the legislature should be able to cope with. The primary issue is that we must regain the ability to control and regulate this industry within our states. The question of what we do, specifically, is secondary to that."
Among the measures legislators have introduced or planned to draft are:
A ban on membership fees for bank credit cards;
A bill emempting Maryland from the federal deregulation act, allowing the state to set its own interest rate ceilings for federally insured state banks, although not for national banks;
A bill that would reduce interest rate ceilings on all forms of loans and credit;
A bill licensing credit card concerns and requiring them, as a condition of the license, to abide by state interest rate ceilings;
A bill restricting interest rates charged by out-of-state retail credit concerns like Montgomery Ward and Sears.
"This is easily going to be the biggest and most controversial issue of the session," said Del. Caspar Taylor(D-Allegany), vice chairman of the House Economic Matters Committee, to which all House Banking regulatory bills would be referred.
"I'm sorry to hear the tone of 'what can we do to get even?'" said William Weaver, the bankers' chief lobbyist here, who spent most of the morning buttonholing members of the House Economic Matters Committee to plead his clients' case. "I can't see any justification for penalizing the banks. What we ought to be asking is where to we go from here to keep the Maryland back credit card operations viable and profitable?"
But the regulatory fever comes at a time when the normally friendly relationship between bankers and legislators is in disrepair. The conflict began last year when the legislature voted, under heavy pressure from the bankers' lobby, to raise interest rate ceilings on loans and credit. Days after that law was signed by Gov. Harry Hughes, two banks announced plans to charge credit card customers a $25 membership fee, in addition to the new rates.
Attorney General Stephen Sachs blocked the move, ruling it illegal. But the banks successfully challenged Sachs' ruling in the lawsuit that led to Levin's ruling.
Because of the ways that federal and state banking laws are now intertwined, the lawsuit took on the tone of a federal case. It was heard in state court because it constituted a challengeto a state offical and his interpretation of state law.
In his ruling, Levin said that the National Banking Act allows national banks in Maryland to charge interest at the same rate as small loan companies. bHe also ruled that the federal deregulation act allows federally insured state banks to charge the same interest rates on comparable loans as the national banks. His ruling applied only to credit cards, but lawyers familiar with the case said the reasoning could be extended to all consumer loans and to the lending activities of savings and loan associations and retail credit corporations.
Sachs' office is expected to appeal the ruling, and several Capitol Hill sources familiar with the drafting of the deregulation act speculated that such an appeal might have a good chance of success.
"It's fair to say there was no understanding [in Congress] of the potential that Judge Levin saw for expanding interest rate ceilings," one congressional source said. "It is far from clear that the Congress had anything like that in mind."