A comparative analysis of the US and EU retail banking markets - Wsbi

In that period, this became an issue for the industry
when inflation rates were very high, and in some
states the rate ceilings were less than banks’ cost
of funds 263 . Restrictive usury laws limited the volume
of credit card lending, thereby limiting the income
potential of lenders, and leading lenders to extend
credit only to higher quality borrowers, shutting
out lower quality borrowers from the market.
This situation resulted in less credit availability and
lower charge-offs 264 .
In a landmark court decision in 1978 265 , the US
Supreme Court ruled that the lender’s location
determined the operative state usury ceiling no
matter where the customer resided – even if the state
of residence of the consumer would have a lower
usury ceiling. This gave incentive to large card issuers
to find a lender-friendly state in which to establish
national operations. The Court ruling of 1978 brought
about liberalisation of interest rates which led to a
significant expansion of credit availability which
facilitated credit to higher-risk borrowers. According
to the FDIC, the liberalisation of interest rates also
resulted in higher credit prices for consumers.
Moreover, it had an important impact on US personal
bankruptcy rates which rose from less than one
per thousand heads of population in the early 1970s
to almost five per thousand heads of population
in 1997 266 .
Under the federal legislative framework, the US
Consumer Credit Protection Act of 1968, which is
part of the US Code (Title 15, Chapter 41), contains in
its Title I – Consumer Credit Disclosure – core provisions
on consumer credit, in particular regarding general
provisions, credit transactions, credit advertising,
credit billing and consumer leasing 267 . The Consumer
Credit Protection Act is considered to be landmark
legislation. For the first time, creditors had to state
the cost of borrowing in a common language so that
the consumer could understand what the charges
are, compare cost and shop for the best deal.
The Act protects consumers defined as natural
persons acting in a transaction for primarily personal,
family or households purposes 268 . A good number of
transactions are exempted from the Consumer
Credit Protection Act, for example credit transactions
of more than $25,000 269 .
6.2.1.1.2 Information disclosure and duty to advise
Among the numerous laws regulating consumer
credit in general, the main set of rules dealing
with information disclosure is the Truth in Lending
Act from 1969. This Act has been implemented by
Regulation Z (adopted by the Federal Reserve Board)
and integrated as Title 1 of the Consumer Credit
Protection Act. Regulation Z has been amended
in numerous occasions. The main purpose of the
Regulation is to prevent abuses in consumer credit cost
disclosure and to require uniformity in such disclosures.
Regulation Z provides two different information
disclosure regimes depending on whether the credit
is an open-end or close-end type of credit. An openend
credit is “when the creditor reasonably considers
repeated transactions, which prescribe the terms of
such transactions and which provide for a finance
charge which may be computed from time to time
on the outstanding unpaid balance” 270 , e.g. credit
cards and home equity release credit lines are openend
credits. Closed-end credit encompasses all
consumer credit not extended under an open-end
plan. Under closed-end credit plans, the consumer
receives a complete disclosure of the costs associated
with the credit transaction before the transaction is
actually consummated.
263 “The Future of Banking in America” by Neil B.Murphy (FDIC Banking Review, 2004), Page. 77.
264 FDIC Bank Trends, March 1998. See also studies by Canner and Fergus (1987) and Villegas (1989).
265 US Supreme Court case “Marquette National Bank of Minneapolis vs. First Omaha Services”
266 FDIC report on “The effect of Consumer Interest Rate Deregulation on Credit Card Volumes, Charge-offs, and the Personal Bankruptcy Rate”, March 1998.
267 Sections 101-181 of the US Code.
268 See definition under General Provisions of the Consumer Credit Disclosure Act – Consumer Credit Protection Act.
269 Exemptions listed under Section 104 of the Consumer Credit Protection Act – Title 1, also include transactions involving extensions of credit primarily for
business, commercial, or agricultural purposes, or to government or governmental agencies or instrumentalities or to organisations; transactions in securities
or commodities accounts by a broker-dealer registered with the Securities and Exchange Commission; credit transactions, other than those in which a security
interest is or will be acquired in real property, or in personal property used or expected to be used as the principal dwelling of the consumer, in which the
total amount financed exceeds $25,000; transactions under public utility tariffs, if the Board determines that a State regulatory body regulates the charges
for the public utility services involved, the charges for delayed payment, and any discount allowed for early payment; transactions for which the Board (the
Federal Reserve Board), by rule, determines that coverage under this title is not necessary to carry out the purposes of this title and loans made, insured, or
guaranteed pursuant to a program authorised by title IV of the Higher Education Act of 1965.
270 Definition provided by the Truth In Lending Act.
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