As they confront the consumer credit dilemma, Maryland's legislators don't have to choose between sticking with our current usury ceilings or gutting them in the trendy name of "deregulation." There is responsible middle ground.
We can't stand pat. The hard, cold fact is that Maryland's current interest rate structure no longer works--not for the lender, the borrower or the state's economy. High interest rates nationwide --fueled by double-digit inflation, a tight money supply and other factors totally beyond Maryland's control--have so increased lending costs that many creditors are no longer able to make a reasonable profit because of the overly restrictive ceilings on consumer lending.
Over the past two years, the beginnings of a credit drought have begun to parch the state. The second mortgage market has virtually dried up. More than 100 small loan companies have turned in their licenses, and dozens of inner-city retailers have closed their doors. Lenders increasingly put their money into unregulated commercial loans.
Our current ceilings mean less and less. Three large Maryland banks are making good on their threats to move their credit card operations to Delaware. Other banks and savings and loan companies that cannot afford to move are actively considering selling their credit portfolios to out-of-state national banks that are not bound by Maryland's credit ceilings.
This situation hobbles Maryland's lending industry and disrupts our economic development. And as we consumer advocates are increasingly willing to admit, it also hurts the borrowing public.
But it would be unwise and unfair to leap to the other extreme--remanding the consumer to the mercies of a "sky's-the-limit" marketplace that not only removes interest rate ceilings but strips away other protections against sharp lending practices.
The lesson of history that some lenders will gouge gets fresh support in early evidence from states that have deregulated consumer lending. In Arizona, for example, there have been reports of home refinancings at nearly 40 percent and used car loans exceeding 50 percent. The New York State Banking Department reports that in 1981 some furniture dealers charged an effective rate of interest exceeding 200 percent on installment sales.
A recent story in The Post gives us fair warning of what deregulation can bring. According to that report, a Prince George's County banker made unregulated commercial loans to businessmen and developers at a rate of 104 percent per year. If deregulation means that commercial borrowers can be bled that way, imagine the perils in store for some relatively unsophisticated consumers.
Deregulators argue that most lenders would not act so outrageously. Perhaps not. But most drivers don't drive drunk, most businesses don't pollute and most parents don't abuse their children. Most laws protect us from the few who would do wrong, not the many who are instinctively law-abiding.
Nor will a law that says interest rates must not be "unconscionable" do the trick. On the contrary, it will subject borrowers and lenders alike to the uncertainties of inconsistent judicial interpretation and will encourage some lenders to venture further, always further, to test the outer limits of the vague, and peculiarly inflatable, notion of "unconscionability." The "unconscionability" standard is an illusion, a parody of protection.
What we need is legislation that lifts ceilings substantially enough to give lenders not only immediate relief but head- space in a volatile national marketplace. In an increasingly competitive credit market, competition should keep interest rates well below the ceilings. But the ceilings, or "abuse points," are essential protections, particularly for consumers unable to shop for credit or who are marginally credit-worthy and most vulnerable to gouging.
The Hughes administration has proposed such a bill to the General Assembly. It contains a two-tier interest rate ceiling: 24 percent for credit sales, 36 percent for loans. It would also prohibit a series of particularly onerous lending practices, which are unjustifiable in light of the generous new rate ceilings.
The Hughes proposal is an effort to avoid extremes and strike a sound balance between the industry's need for rate relief and the consumer's need for protection. It will undoubtedly be vigorously debated. But the fact that it is drawing fire from both those who want to hold the line and those who would make the sky the limit suggests that it might be just the right approach