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Judge Upholds Act Overriding Usury Law.

A U.S. District Court judge in Harrison has put the final nail in the coffin of the state's 125-year-old usury law -- at least as it applied to banks.

Judge H. Franklin Waters issued a Nov. 21 order and memorandum opinion upholding the constitutionality of the Gramm-Leach-Bliley Financial Modernization Act of 1999.

The act overrode the state's usury limit--which capped interest rates on personal loans at five points over the Federal Discount Rate -- by allowing state-chartered banks to set their loan rates according to rates charged by their out-of-state competitors.

The complaint, filed by Steve Johnson of Mountain Home against the Bank of Bentonville, was actually a "test case" floated by the Arkansas Bankers Association to ease concerns of bankers who feared the act wouldn't pass constitutional muster.

"There are some banks that have already raised their rates modestly," said State Banking Commissioner Frank White. "But I would say the majority of them wanted to see this confirmation."

White said his office has been telling banks to follow their lawyers' advice on the issue.

In his opinion, Waters said Congress has long used its powers under the Commerce Clause to preempt state banking laws, including usury provisions. Even Arkansas' usury law has been superseded in part by prior legislation that removed the usury cap on agricultural and business loans over $25,000 and on mortgage loans, according to the opinion.

Arkansas' usury--the most restrictive in the nation -- has for years vexed local bankers who have tried at least three times in the past two decades to overturn the law.

Bankers have argued that the law stymied economic growth by limiting credit and forcing money to leave the state. But as an amendment to the state's Constitution, the usury cap could only be overturned through a statewide referendum or federal legislation.

One such referendum that passed in the early 1980s was subsequently interpreted by the Arkansas Supreme Court to be just as restrictive as the previous usury cap. Voters soundly rejected later attempts in 1988 and 1990 to do away with the law.

The final catalyst for change was financial deregulation that swept across the nation in the 1990s, most recently and significantly the GrammLeach-Bliley act.

As out-of-state banks branched into Arkansas by buying many of the state's Iargest banks, fears arose that the usury restriction on that banks still based here would put them at an unfair disadvantage.

In 1998, the Office of the Comptroller of the Currency ruled that interstate banks can charge the interest rates permitted by their home states wherever the bank operates. The Federal Deposit Insurance Corp. issued a similar ruling three months later. By June 1999, about 25 percent of the state's $29.77 billion in deposits were held by Arkansas branches of out-of-state banks, according to Waters' opinion.

"Our argument all along was we had to level the playing field because of the acquisition of all these banks by out-of-state firms," said White.

The Gramm-Leach-Bliley allows Arkansas banks to set their rates according to the laws of their out-of-state competitors.

For example, White said, Regions Financial Corp.'s home state of Alabama bars loans that exceed "unconscionable" limits. Arkansas banks that compete with Regions' branches can follow that law, he said.

"But I don't think you'll see a big jump in interest rates," he said. "I think there will be just a modest increase."
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Comment:Judge Upholds Act Overriding Usury Law.
Author:Chaney, Don
Publication:Arkansas Business
Article Type:Brief Article
Geographic Code:1USA
Date:Dec 4, 2000
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