I hope Gov. George Pataki signs the bill that prohibits "universal default" by bank card issuers - the practice of increasing rates when a cardholder goes delinquent with another business.
Signing the bill will provoke a useful debate about preemption abuse by the banking industry and its regulators in Washington.
But even if the governor vetoes the bill, New York and other states can effectively challenge universal default under other statutes.
Industry lawyers, of course, disagree. They are united in the belief that federal law preempts any state law that tries to prohibit the practice. One of them, quoted recently in these pages, went so far as to call preemption an "ironclad" defense. We'll see.
I know a thing or two about preemption doctrine. I have defended it vigorously in lawsuits, legislative skirmishes, numerous Viewpoint articles, and elsewhere, but I have never believed it is invulnerable - or that it should be.
A variation on universal default has been around for a long time, although until recently it usually applied only to defaults on loans of affiliates. It became universal - theoretically capturing any default anywhere - in the late 1990s, when issuers went berserk adopting sneaky and unfair pricing schemes.
Universal default was perhaps their most insidious scheme.
Mary Doe in Texas gets a Visa solicitation from a bank in Delaware that says all sorts of nice things about the product and offers a standard APR of 16%. She signs up but naturally doesn't read the agreement, because it is written in legalese and is so impossible to understand that, for all intents and purposes, it is intrinsically deceptive.
Consequently, she fails to see, much less comprehend, the default clause. She uses the card and diligently pays her bills on time, but along the way she misses a bill with a different business. Her bank discovers this and quickly doubles her APR.
Even worse, because virtually every issuer has adopted the practice, her infraction sets off a chain reaction with all her other creditors. Some of them raise her rates, while others freeze her loans or shut her out of the credit system. As if in concert, they put her on a road to possible financial ruin.
The banks and the see-no-evil federal officials celebrate universal default as a fair, efficient way to price according to the demands of risk management. But to make absolutely sure no one can challenge it, the banks assert that it is a component of a price. So described, they insist it is protected under the preemption authority of federal law and several Supreme Court decisions.
For a generation this strategy has worked unfailingly, but in a collision with a state law, it will fail.
Plain and simple, federal preemption does not apply to state laws that prohibit unfair, unconscionable, discriminatory, or deceptive practices, whether in pricing or collection matters.
That universal default is unfair and unconscionable should be obvious. When exercised, it can rapidly and permanently defame its unlucky victims across a broad spectrum, painting them as modern-day Hester Prynnes for whole communities to condemn.
Because it can lead to a very public tarnishing, it likewise can trigger gross invasions of privacy, not to mention violations of antidiscrimination laws.
In short, universal default is wildly disproportionate to the wrong and made all the worse because it is the handiwork of giant banks acting like schoolyard bullies.
If a state sues some of those banks to stop the practice, it likely will discover that a large number of card solicitations are to consumers who have missed payments on accounts in the past, and that most banks are adept at predicting how many consumers will default on other loans.
In the days when federal officials were more respectful of states, few would have disagreed with the notion that this process smacks of a bait-and-switch. Why isn't it still? Why do the feds tolerate it?
Sadly, they have deluded themselves about the true importance of the practice. They have bought a myth, sold to them by banks, that such practices should be tested only in the marketplace.
It is a myth because the marketplace is organized and acts like a cartel. Among other things, the cartel pulls out all the stops to protect members from challenges to their franchises, their products, and their pricing.
The bank card industry gets away with this because federal officials invariably are on its side. It makes you wonder why they are so subservient to the industry. Have they lost the ability or the will to confront bad practices? Do they lack the resources, budget, skills, and direction from Congress to keep up with it?
Maybe their problem is that they have been captured by their banks, that the banks regulate them, rather than the other way around.
In recent years the OCC and the OTS have all but invited such a conclusion. Consider when they began competing against each other to get banks to join their fold with promises to be the most protective against states and outside competitors. They acted like trade associations, and they continue to do so.
Their misguided generosity toward banks and enmity toward states have brought them to the astonishing point of literally repealing the states' historical power under the 10th Amendment to protect residents from egregious business practices.
A good thing about an all-out fight with the states over universal default is that it will expose this baffling downfall of federal officials.
But if they have any sense, they will avoid the fight like the plague - no amicus briefs, no letters to state attorneys general to surrender to their supreme authority. Instead, they will make a silent concession to the states to prosecute as they wish.
Of course, the more logical strategy is to beat the states to the punch and scale back universal default on their own. At the same time, they should attack the cause of such practices: a lack of competition.
In that vein, they should accelerate the cartel's breakup and enable outside businesses to start selling bank cards with limited federal oversight. Competition, not more laws, is the best solution to an industry that is out of control.
One way to look at the universal default issue is that it affords the federal officials an excellent opportunity to redeem themselves from a series of terrible mistakes. Other than their banks, who have no friends on the issue, who would oppose them?
Even Congress, which is usually a reliable ally to PAC contributors from the bank card community, wouldn't touch universal default with a 10-foot pole. Not even the delegations from the capitals of the card world, Delaware and South Dakota, would be that dumb.
The same opportunity exists for banks. They can drop universal default on their own or whisper to the federal officials to force its demise universally.
But if history is any guide, they will dig their heels in and turn the whole thing into a battle to preserve preemption. Their size and power have corrupted their ability to think and act sensibly.
