BEVERLY — A local judge and a Salem lawyer are taking on the multibillion-dollar credit card industry, calling the interest rates charged to one Beverly woman struggling to pay off two old credit card debts "unconscionable."
Former Salem District Court presiding Judge Robert Cornetta, who is now sitting by special assignment in Lawrence Superior Court, ruled earlier this month that Citibank's interest rates, which at some points soared to 54 percent, were "so outrageous" that they should not be enforced.
He ordered that the woman should not have to pay interest above 18 percent.
His ruling sets the stage for an appeal that Salem lawyer Richard Wise hopes will lead to changes in the credit card industry.
Wise, who represents the Beverly woman pro bono, believes Cornetta may be the first judge in Massachusetts to take a stand on the issue, and that while the ruling is not binding on other judges, it's likely to generate discussion and argument in other cases.
Underlying every basic contract, Wise said, is the understanding that it is being entered into in good faith and fair dealing.
But not when it comes to credit card companies.
"Have you ever tried to negotiate a credit card contract?" Wise said. "The terms or the interest rates?"
It's a one-sided exercise, he said, and one that's fundamentally unfair to consumers like his client.
Rosemary Walker DeCristoforo, who agreed to let her case be used as a test case, opened one of the credit cards in 1984 and opened a second card 10 years later, in 1994. Both of the cards are now issued by Citibank.
By 2009, the balance on the older card was more than $25,870 and on the 1994 card, $8,465. At one point, she was making more than $1,000 in payments each month to Citibank to try to pay down her debt.
But while DeCristoforo acknowledges that she owes money for the charges she made to the two cards and for cash advances she took hoping to save her business, much of the balance now consists of interest — which ranged from a low of 10 percent to a high of 54.7 percent, the result of some late payments.
DeCristoforo and her lawyer argue that the interest should be limited. While she originally argued that the cap should be 7 percent, Cornetta found that the law she cited to come up with that number does not apply to Citibank because, like a lot of other credit card companies, it does business out of South Dakota, a state that did away with all limits on credit card interest in order to lure the company and thousands of jobs to the state back in 1980.
Wise said the banks are "gorging themselves" on the profits from credit cards, which exceed $225 billion a year.
"People were encouraged to use credit cards as a way of spreading out costs," Wise said. They used them to pay for necessities — auto repair, college textbooks, even groceries.
Credit card companies even offered incentives on certain types of purchases.
"This dispute highlights an issue of national concern," Cornetta wrote, "mounting credit card debt and unregulated interest rates, which make paying that debt next to impossible."
Consumers like DeCristoforo, who fall behind on payments because of a financial setback, find themselves in a never-ending spiral of debt.
"Merely because Citibank is able to charge interest premised on South Dakota law, which does not cap interest, (that) does not, however, mean Citibank can charge any interest rate," Cornetta wrote. "Citibank's interest rate must still comport with common law concepts of fairness such as unconscionability."
While the rates were not always unreasonable, Cornetta said, citing the original 10.6 percent interest rate, Citibank continued to increase the rate as DeCristoforo fell behind, until it reached 54.6 percent (not including late fees).
"Substantial interest rate hikes such as this have greatly contributed to the consumer credit crisis in America," the judge wrote.
"With interest rates as high as 40 and 50 percent, a significant portion of the debtor's monthly payment goes toward paying interest without touching the underlying debt. At these rates, individuals must make monthly payments for years before putting a dent in their debt, especially when one owes credit balances in excess of $25,000, as is the case with DeCristoforo."
And that, the judge said, is a drain on the economy.
It's also a drain on the justice system, Wise argues. Court dockets all over the country are now clogged with thousands of civil lawsuits brought against consumers over unpaid balances.
Lawyers for Citibank have asked Cornetta to reconsider his ruling; a hearing in the case is scheduled for March 10 in Lawrence Superior Court.
Courts reporter Julie Manganis may be reached at 978-338-2521 or at firstname.lastname@example.org.