Americans now owe more than $13 trillion on their mortgages and credit cards, more than two and a half times as much as owed twenty years ago. We have become a nation of consumer debtors, not by deliberate policy choices made by elected officials but through the unintended consequences from court decisions interpreting arcane banking laws passed decades earlier.

The Supreme Court’s opinion in Marquette National Bank v. First of Omaha Corp. (1978) sent us down this path. The seeds of that opinion were sown more than a century earlier when, amid the chaos of the Civil War, Congress passed the National Bank Act of 1864 with the goal of a creating a national banking system to help stabilize the nation’s finances. Among its provisions was a rule that prevented a state from applying harsher laws to national banks than the state applied to its own locally charted banks.

More than 110 years later, the Marquette case found that a national bank was not only protected against discrimination but remained subject to its home state laws when it transacted business in another state. Essentially, the bank could export the state law wherever it was physically located into any state where it might find customers. A few states obligingly repealed their usury laws, and national banks rushed to plant lending operations in those states.

The result was the end of state usury laws as a check on abusive consumer lending. Because banks now could lend at whatever price they chose, consumers whose financial circumstances previously precluded them from borrowing now found large lines of credit available to them but often at exorbitant interest rates. As debt grew during the 1980s and into the early ’90s, consumer credit was euphemistically said to have become “democratized.”

Democratized debtors tended to pay later than their earlier counterparts, and the banks quickly saw an opportunity to profit from the fees these wayward debtors were charged. How much of a fee? Again, in a 1996 case known as Smiley v. Citibank (South Dakota), the Supreme Court had the answer: whatever fee allowed by the state law where the bank might choose to locate a lending operation. Of course, the bank just happened to have picked a state that had no regulation of credit card fees. After Smiley, credit card fees became as important a profit center as the interest charged on the debt. Customers who always paid late were the most profitable customers to have.

More recently, the Supreme Court has backed the Office of the Comptroller of the Currency (OCC) in its efforts to displace state consumer protection laws that would otherwise apply to national banks. The OCC argued that state consumer-protection laws might jeopardize the safety and soundness of the national banking system, as if compliance with otherwise applicable law should be considered an unnecessary obstacle to financial stability. The Court’s decision leaves the OCC, perhaps the agency most captured by the industry it purports to regulate, the sole protector of consumer interests against national banks.

The tendency of banking interests to win at the expense of consumers is hardly the result of a back-room conspiracy within the Supreme Court but the result of a legal system with built-in advantages for big business. The consumer financial industry can pick the best cases and employ the best lawyers to establish a legal principle that might entitle it to an extra $20 fee that, repeated over several billion transactions, amounts to real money. Executive branch agencies in administrations that are hostile or indifferent to consumer interests often back the industry’s position. On the other side is a consumer who is probably just better off paying the extra $20 but chooses to fight. It is a one-sided match.

Other Contributions to the Forum

“The Supreme Court and the Election: What’s at Stake,” by Herman Schwartz

“Safety Last,” by David C. Vladeck

“Health Cares,” by Sara Rosenbaum

“Senior Rights & Wrongs,” by Harper Jean Tobin

“Hard Knocks in the Workplace,” by Eric Schnapper