Class Action Lawsuit Alleges Major U.S. Banks Have Colluded For Decades to Fix Interest Rates

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A proposed class action lawsuit claims that several large banks in the United States have artificially raised interest rates on a number of variable-rate consumer and small business loans.

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The 57-page antitrust lawsuit contends that JPMorgan Chase, Bank of America, Wells Fargo, Citibank, U.S. Bank, PNC Bank, Truist Bank and several yet-unnamed codefendants have since at least 1992 illegally conspired to determine loan interest rates by agreeing with each other on the “prime rate” each bank will charge its most creditworthy customers for short-term loans. According to the suit, this “collusively-determined” prime rate is then reported by the Wall Street Journal as the Wall Street Journal U.S. Prime Rate, to which practically all Home Equity Lines of Credit (HELOCs) and consumer credit cards are indexed.

By coordinating interest rates for “prime rate” short-term loan borrowers, the defendant banks have not only charged those customers supracompetitive rates, but also artificially inflated the interest rates for millions of loans tied to the WSJ Prime Rate, the class action lawsuit summarizes.

The case explains that from 1975 through roughly 1992, the Wall Street Journal determined the WSJ U.S. Prime Rate by surveying major banks about their lowest-rate loans and publishing the responses, including the lowest and highest reported prime rates. This method of reporting, which the suit stresses encouraged banks to compete with each other to offer the lowest-rate loans to creditworthy consumers, served as a “close proxy” for the banks’ cost of borrowing money that they would then lend to consumers, and the spread between a bank’s prime rate and the Fed Funds Target Rate (FFTR), set eight times a year by the U.S. Federal Reserve, marked the approximate minimum gross profit a bank would earn when lending money, the filing says.

Importantly, prior to 1992, the suit notes, the spread between the WSJ Prime and FFTR varied frequently, as expected in a competitive market, with a standard deviation of 45.4 bps.

“This variation reflected, among other factors, each bank’s unique financial position, the efficiency of its business operations, market conditions, broad consumer credit characteristics, and technological changes.”

In early 1992, however, the WSJ changed its method for determining and publishing the rates from a listed range to a single, unified figure based on the range of data, the complaint continues. Consequently, this figure transformed into a highly influential reference for consumers as a benchmark representation of interest rates from major financial institutions across the United States, the case emphasizes.

The lawsuit claims that as the conspiracy matured and stabilized by mid-1994, the spread between the WSJ Prime Rate and FFTR, which once regularly hovered at 175 basis points (meaning creditworthy customers at major banks could typically obtain a loan a 1.75 percent above the rate at which banks could borrow money for themselves), grew to exactly 300 basis points (bps)—and stayed there on all but 82 days since then.

“Whether the Journal understood it or not, unlike the pre-1992 ‘range’ method, the new ‘consensus’ method discouraged competition. Because the Journal would no longer publish lower-than-consensus rates, individual banks lost the ability to exert public competitive pressure on other large banks.”

According to the case, the second phase of the alleged conspiracy began when, in February 1994, the Federal Reserve Bank began publishing explicit targets for Fed Funds, by which point the bank defendants “had learned to maintain their rates in lockstep.” Per the suit, the banks worked together to “peg their prime rates to these publicly available, high-profile benchmarks,” ultimately settling on Fed Funds plus 300 basis points as the formula for setting prime interest rates.

In other words, the lawsuit relays, even the most creditworthy borrowers have not accessed interest rates any lower than three percent above the FFTR since the 1990s, which is notable considering the average WSJ Prime Rates had always floated around one to two percent higher in almost every report before then.

The lawsuit argues that this level of uniformity “cannot be the result of independent decision-making” and that the 300-point disparity between the WSJ Prime Rate and the FFTR is “not a natural equilibrium” that could be maintained over roughly three decades through recessions, regulatory upheavals and technological developments.

“Instead, it is exactly what it appears to be: a coordinated price floor,” the suit alleges.

This alleged interest-rate manipulation has eliminated competition between the banks and ensured that borrowers pay a higher interest rate across the board, regardless of factors like credit score and market conditions, the complaint says.

The interest rate antitrust class action lawsuit looks to cover any individuals who made a payment on a WSJ Prime Rate-indexed HELOC and/or credit card at any point between October 16, 2021 and the date that the allegedly anticompetitive conduct ceases.

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