What Are Usury Laws?
Usury involves lending money at an interest rate that is excessively high or surpasses the rate permitted by law. Usury laws protect consumers by regulating the interest charged on loans. In the U.S., individual states set their usury laws, notwithstanding the potential jurisdiction under the Constitution’s commerce clause. Historically, Congress has not heavily focused on usury at the federal level.
Key Takeaways
- Usury laws limit the interest rates on various loans.
- These laws are enforced by states rather than the federal government.
- Interest rate caps can vary significantly between states.
Inspirational Examples of Usury Laws by State
Credit card companies and nationally chartered banks often adhere to the interest rates allowed by the state where they were incorporated. This means they might bypass the stricter usury laws of the states where borrowers live.
Delaware and South Dakota are popular incorporation choices for many financial institutions due to their lenient interest rate regulations. Nevada imposes no usury limits, though Pennsylvania considers interest above 25% as criminal usury. New Jersey’s usury cap is set at 30% for individuals and 50% for corporations.
In 2023, the Consumer Financial Protection Bureau (CFPB) and the New York Attorney General sued Credit Acceptance Corporation for deceptively imposing high-cost loans on used car buyers.
Embracing Effective Legislative Changes
The efficacy of usury laws has been under scrutiny due to U.S. Supreme Court decisions and legislative actions allowing financial institutions to sidestep limits. A notable case, Marquette National Bank v. First of Omaha Corp., permitted credit companies to apply their state’s interest rates to customers across the country.
Delaware intensified this trend with the Financial Center Development Act, which removed limits on fees and interest for consumer lending. In 2023, a group of U.S. Senators introduced the Empowering States’ Rights to Protect Consumers Act, aiming to restore the states’ ability to limit consumer loan interest rates and tackle consumer debt issues.
Defining Predatory Lending
Predatory lending involves imposing unreasonable and abusive loan terms on borrowers, charging outrageously high interest rates, and requiring substantial collateral. The FDIC harshly criticizes such practices.
Rooted in History: Early Usury Laws in America
The first usury laws in the U.S were implemented by 18th-century American colonies, establishing an interest rate cap at 8%.
Championing Fair Lending Practices: The Role of the CFPB
The CFPB plays a crucial role in identifying and curbing abusive practices against consumers. Since the passage of the Consumer Financial Protection Act of 2010, the CFPB, along with federal and state regulators, has been empowered to address and rectify harmful lending practices.
The Bottom Line: Safeguarding Consumer Interests
Usury laws are designed to shield consumers from predatory lending and excessive interest rates. Individual states in the U.S. determine their usury laws, ensuring region-specific protection. The foundation of such laws dates back to the 18th-century American colonies.
Related Terms: interest rate, predatory lending, Consumer Financial Protection Bureau, commerce clause, constitutional law.
References
- World Population Review. “Usury Laws By State”.
- CFPB. “CFPB and New York Attorney General Sue Credit Acceptance for Hiding Auto Loan Costs, Setting Borrowers Up to Fail”.
- Justia. “Marquette Nat. Bank v. First of Omaha Svc. Corp., 439 U.S. 299 (1978)”.
- Delaware Journal of Corporate Law. “Delaware’s 1981 FCDA Preview”, Pages 108-109.
- Senator Sheldon Whitehouse. “Whitehouse, Colleagues Introduce Bill to Shield Americans from Sky-High Credit Card Interest Rates”.
- FDIC. “Predatory Lending Resources”.
- Americans For Fairness in Lending. “The History of Usury”.
- CFPB. “CFPB Issues Guidance to Address Abusive Conduct in Consumer Financial Markets”.
