A task force has recommended that the Maryland legislature "eliminate all specific interest rate and fee limits as now specified in Maryland state laws." In lieu of those limits, it recommends a prohibition against charging "unconscionable rates" and requirements for periodic disclosures of rates.
After careful consideration, the Maryland State and District of Columbia AFL-CIO has joined with the Maryland Consumers Coalition to oppose deregulation. We believe the General Assembly has done an excellent job of setting usury limits for more than 100 years. To turn that responsibility over to money lenders--with the word "unconscionable" as their guide --would be like putting the fox in the henhouse with the chickens.
Proponents of lifting the ceiling claim that this would result in only modest increases in interest rates for consumers. They note, for example, that when New York removed interest restrictions, most credit card rates stayed below 20 percent. But credit card interest is just one type of credit that would go unrestricted. In Texas, for instance, small loan companies are lending at rates of 200 percent. In Arizona, used car loans are being made at rates of 32 percent to more than 50 percent, and second-mortgage refinancing at 100 percent.
There are those who say that the general tightening of credit resulting from interest-rate ceilings below the market rate is likely to cause layoffs and sales losses. This is a short-ranged view. The drain of higher interest rates prolongs and intensifies a recession, which generally starts during a high-interest rate period and continues for a while. People's purchasing power is reduced in two ways: their interest rate goes up, and so do the rates businesses must pay when they borrow, which in turn are passed on to the consumer through prices. As prices escalate, demand is reduced, slowing down the balanced growth of the economy and causing widespread unemployment.
>We have seen what unrestricted interest rates have done to home and auto sales industries; sales have declined as the market has shrunk. Farmers also are having difficulties buying machinery and staying in business.
Much has been made of the threatened shift of credit card operations from Maryland to Delaware because of the current 18 percent ceiling. But experience in states with even lower ceilings points up another factor: as long as depository institutions have a certain amount of non-interest-bearing demand accounts and relatively low-interest saving passbook accounts (as well as high-cost savings certificates) they can and do meet many of the state's needs under a reasonable ceiling, even during temporary periods of high interest rates.
Deregulation will not keep in Maryland those state financial institutions bent on going elsewhere, since considerations other than interest charges--tax breaks, prepositioning of interstate banking--have greater influence. We have only to look at New York to see that even after the raising of interest ceilings to 25 percent, three of the major state-based banks moved to Delaware.
Look at the assets of some of the largest banks in Maryland as of December, 1981: Maryland National Bank, $4.1 billlion; First National Bank, $2.7 billion; Equitable Trust, $1.97 billion; Suburban Trust, $1.6 billion. Does it look like the banks are hurting?
Yet how much will credit deregulation cost the consumer who takes an average loan? If the cost of a loan rose from the present national average to the level of the highest annual percentage rate (from 20.42 percent to 33.18 percent), a borrower would pay more than $300 in additional finance charges on a one-year, $2,500 loan--assuming the deregulation rate did not exceed the highest national ceiling.
In Maryland and other states, the legislators have periodically adjusted the usury interest rate ceilings in response to significant market changes, in a manner that protected the interests of the people. With Maryland's ceilings kept at reasonable levels, the state has been able to maintain adequate economic growth. We see no reason to change.
When the people of a state choose to establish usury ceilings, they are collectively bargaining with the lenders, telling them that we will pay so much and no more; if you insist on charging more, you can keep your money until your reduce your interest rates.