With the creditcard contracts creditcard companies can unila

With the credit-card contracts, credit-card companies can unilaterally change the interest rate. Discuss whether there should be any requirements of reasonableness or fair dealing implied in the agreement. Analyze and evaluate the various issues presented while arguing and debating the connections between business, law, politics, and ethics.

Solution

The Growth of the Credit Card Industry

Credit cards have revolutionized the way Americans live and how they spend their money. In the United States, large retailers were the first to issue the \"charga-plates\" that eventually became the credit cards oftoday. Charga-plates, which first appeared in the late 1920s, resembled military dogtags and were issued to a store\'s better customers to allow them to post purchases to a store account. Today, retailers still form an important part of the credit card market, but it is the third-party universal card that is now preeminent.

When a credit card is used to make a purchase, the cardholder has received an unsecured loan from the card issuer. Interest could accrue immediately, but under most credit card agreements there is a \"grace period\" of 25-30 days during which no interest is owed. Borrowing money without security is almost always more expensive than when a loan is secured by some form of collateral, because the lender is relying only on the borrower\'s legally binding promise to pay as a guarantee of repayment. Higher interest rates compensate the lender for the higher risk of borrower default. From the colonial era through the 1970s, most states controlled interest rates on unsecured consumer loans, but by the late 1970s, due to high inflation and extremely high interest rates for money in commercial markets, the ceilings set by many states were too low to make consumer lending profitable. During this same period, banks were becoming increasingly active in the credit card market. Many banks saw tremendous business potential in this form of consumer credit, but they were prevented from charging market interest rates due to state usury laws.

Deregulation of Interest Rates:

In 1978, the Supreme Court rendered a decision that would prove to have tremendous ramifications for the growth of the credit card business in the United States. In Marquette National Bank of Minneapolis v. First of Omaha Service Corp. (\"Marquette\"), the Court ruled that section 85 of the National Bank Act allowed a national bank to charge its credit card customers the highest interest rate permitted in the bank\'s home state, regardless of the interest rate limitations prevailing in the customer\'s state of residence.28 The Court was primarily concerned with interpreting the language and history of section 85, but the solicitor general of Minnesota, attempting to prevent First Omaha from soliciting credit card customers in Minnesota at higher Nebraska interest rates, also contended that allowing the exportation of Nebraska\'s interest rates would make it very difficult for states to enact effective usury laws.

The Economic Argument Against Regulation:

From an economic perspective, interest is the cost to a borrower for the use of money over a specified period of time. The actual interest rate charged will reflect several factors, including (1) the relationship between the supply and demand for credit in the relevant market, (2) the element of uncertainty of repayment, or risk of default, which will vary with the type of loan and borrower, and (3) the perceived cost of \"riskless\" credit.52 These factors together will create a \"market\" rate of interest. When a usury ceiling exists, market forces will determine the cost of credit as long as the market rate does not exceed the legal rate. If, however, the market rate is higher than the legal rate, lenders have no economic incentive to lend because the legal rate produces insufficient profit relative to the costs and risks of making loans. Lenders will decline to make loans at the legal rate and will look instead for investments that will earn a market rate of return.53 Consequently, there will be less credit available in the market affected by the usury statute, thus inhibiting the ability of consumers to express their preferences for goods in the economy with money. The prices and terms of the credit that is available will often be more restrictive because lenders will compensate for their inability to charge a market interest rate by lending to consumers who offer lower risk and by increasing costs related to borrowing that are not considered under the law to be interest, such as down payments, processing fees, and collateral requirements.

The Problem of Greed

In the United States, there is a historical distrust of banks and the banking industry that can be traced to the earliest days of the republic. This distrust is based in large part on the huge amounts of capital amassed by banking institutions and how those institutions have tended to exercise undue influence over the political and economic system. Today, this concern is often dismissed as so much populist nonsense, but the 1980s showed that the general public is wise to be suspicious. The federal government, and consequently the nation\'s taxpayers, have borne huge costs as a result of banking deregulation.

The truth about fair dealing:

Banking is also a business but that cannot be a loot business by taking advantage of a finacially lower grade person. Interest rates can be reasonable to deal with all the rules, profits, conditions etc... but should not be over rated. Some times no mortagage loans take high interests because there is risk of default but the loan takers also accept to enter into the deal becasue of their need. This is a hypothetical situation this cannot be unruled as business and zero ethics because banks are also facing the risk of default in doing that action. Hence, whether it is fair or not depends upon the way the rate is designed a simple backed loan with a high interest may be unethical but a zero collateral high rate loan cannot be termed as unethical because of the risk it carries.

Reference:

http://lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?article=1961&context=lsfp