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Is Charging 4,000% Interest Legal?

Artfully maneuvering among interviews of banking officials and culprits of credit card debt, The Wizards of Consumer Lending, a PBS documentary, shows some of the most subtle - and not so subtle - tricks that have earned the credit industry billions over the past half-century, at the expense of the consumer. And Shailesh Mehta, former CEO of the ill-reputed Providian, talks about the "credit protection" services Providian offered to compete in the industry. In particular, the US Truth-In-Lending Act (TILA) was passed in 1968 to mandate disclosure of terms in all financial lending, forcing cash-advance agencies - such as those offering payday lending - to advertise the 460% interest for a 2 week loan to consumers. Even with these steep rates, the customer – desperate to stave off bills – can accept or deny the loan. However, credit banks found a loophole that circumvented any acquiescence from the customer and cashed in a phenomenal return. The wording of TILA exempts disclosure of terms on convenience charges, and in an amazing display of “what is not legislated will be exploited” mentality, banks can charge an overdraft fee or “Non-contractual courtesy” of $25 on a $10 purchase – that the customer cannot deny – which amounts to an annual rate of around 6500% on a two-week loan. And some banks allow as much as 4 overdrafts per day. Many similar banking practices were the result of depression-era regulations that were systematically lifted as pro-business ideologies (and fading memories) took hold in the decades following the 30s. The inevitable crux today is government is challenged with insuring the survival and strength of both consumer spending and the banking industries – and what exploits the consumer is sustainable for the banking industry. The biggest flaw is that such usurious rates – regulated by TILA or not – should be discretionary for the consumer. As long as the borrower can decide whether they want a “non-contractual courtesy”, the consumer has a sizeable measure of protection. Last November, in face of the credit crises, new federal regulations will tighten some of the restrictions on overdraft fees. The true test of these new rules, however, remains to be seen.