What Are Usury Laws?
Usury is lending money at aninterest ratethat is unreasonably high or higher than therate permitted by law. Usury laws protect consumers by governing the interest charged on a loan. In the United States, individual states are responsible for setting usury laws. Though this type of financial activity could fall under the Constitution's commerce clause, Congress has not traditionally focused on usury at the federal level.
Key Takeaways
- Usury laws set a limit on how much interest can be charged on a variety of loans.
- Usury laws are enforced by individual states rather than on a federal level.
- Interest rate limitations can vary from one state to the next.
Examples of Usury Laws By State
Credit card companies charge interest rates that are allowed by the state where the company was incorporated rather than follow the usury laws that apply in the states where borrowers live. Nationally chartered banks similarly can apply the highest interest allowed by the state where the institution was incorporated.
Delaware and South Dakota may be chosen as the states of incorporation for many financial institutions because of the freedom allowed regarding interest rates. Similarly, Nevada has no usury limits. Pennsylvania considers interest above 25% as criminal usury. New Jersey's general usury limit is 30% for individuals and 50% for corporations.
In 2023, the Consumer Financial Protection Board and the New York Attorney General sued Credit Acceptance Corporation for misrepresenting the cost of credit and tricking customers into high-cost loans on used cars.
Legislation
The effectiveness of usury laws is often debated after decisions by the U.S. Supreme Court, and legislation gave financial institutions the capacity to circumvent limits. The high court’s decision in the case of Marquette National Bank v.First of Omaha Corp. allowed credit companies to charge customers out of state at the same interest rates the companies could charge in the states where they were incorporated.
Delaware’s introduction of the Financial Center Development Act, which eliminated limits in the state on fees and interest that can be charged on consumer lending, further amplified the desire among financial institutions to move there.
In 2023, U.S. Senators Sheldon Whitehouse, Jack Reed, Elizabeth Warren, Bernie Sanders, and Jeff Merkley introduced the Empowering States’ Rights to Protect Consumers Act to restore states’ ability to limit consumer loan interest rates and help address the billions of dollars that consumers hold in loans and credit card debt.
What Is Predatory Lending?
Predatory lending is defined by the FDIC as “imposing unfair and abusive loan terms on borrowers." Predatory lenders charge unreasonably high interest rates and require significant collateral.
When Were Usury Laws First Enacted in the United States?
The first usury laws were adopted by 18th-century American colonies, setting the interest cap at 8%.
How Does the CFPB Help Prevent Usury?
The CFPB identifies abusive conduct against consumers. In 2010, Congress passed the Consumer Financial Protection Act, which allows the CFPB, federal banking regulators, and states, to identify wrongdoing and target firms that are committing abusive acts or practices.
The Bottom Line
Usury laws aim to protect consumers from predatory lending and high-interest rates. Individual states in the U.S. set usury laws for their region. 18th-century American colonies established the first usury laws in the United States.
FAQs
Usury laws set a limit on how much interest can be charged on a variety of loans. Usury laws are enforced by individual states rather than on a federal level.
What is the usury law? ›
The Basic Law:
In California, usury is the charging of interest in excess of that allowed by law. As stated above, due to the machinations of various entities seeking to protect their interests, the usury laws are complicated and there are many exceptions to the general rules.
What's a usury law quizlet? ›
Usury laws are regulations governing the amount of interest that can be charged on a loan. Usury laws specifically target the practice of charging excessively high rates on loans by setting caps on the maximum amount of interest that can be levied.
Are usury laws good or bad? ›
In most states, including California, lenders are bound by specific standards under usury laws. Usury laws have a long history of protecting borrowers from exorbitant interest rates on loans.
What do usury laws prohibit? ›
Usury prohibit lenders from charging borrowers excessively high rates of interest on loans.
What is an example of usury? ›
What is an example of usury? If the law on maximum interest rates sets a limit of 15%, charging a borrower 25% would be usury. Even if there are no laws on this, charging someone 55% on a loan would be considered usury because that interest rate is considered extremely high.
What is usury crime? ›
Criminal usury is the issuing of loans at illegal interest rates, usually by organized crime, to persons unable to obtain a loan through legitimate channels. In most large cities, the interest on such a loan is 20 percent, with the interest payable weekly until the principal is repaid.
What does usury laws mean in history? ›
What Are Usury Laws? Laws that limit interest rates or even prohibit the charging of interest altogether have historically been referred to as usury laws. The term ``usury'' dates back to the Middle Ages, where it was used in negatively to refer to any kind of interest-bearing loan.
What happened to usury laws? ›
In the 1978 case, Marquette National Bank v. First of Omaha Service Corp., the Court unanimously held that nationally chartered banks may charge the highest rate allowed in the bank's home state. This is why many banks are in states like Delaware and South Dakota, which have very liberal or nonexistent usury laws.
Why was usury illegal? ›
Usury has a long history. It has primarily become illegal to prevent individuals from predatory loan practices; situations in which people need to borrow money but are charged a high interest rate, often resulting in difficulty paying back the loan with interest and/or financial ruin.
Quick answer: Usury laws are interest rate laws designed to prevent lenders from charging exorbitantly high rates on loans. These rules often vary by state. Depending on where you live, you could get a small loan with an annual percentage rate of 36%, 300% or 600%.
What is wrong with usury? ›
The term may be used in a moral sense—condemning taking advantage of others' misfortunes—or in a legal sense, where an interest rate is charged in excess of the maximum rate that is allowed by law.
What happens if the usury law is violated? ›
Penalties for violating usury may include recovery of a multiple of the usurious interest paid, elimination of the borrower's obligation to pay interest going forward, or even jail time.
What is the main purpose of a usury law? ›
Usury laws protect consumers by governing the interest charged on a loan. In the United States, individual states are responsible for setting usury laws. Though this type of financial activity could fall under the Constitution's commerce clause, Congress has not traditionally focused on usury at the federal level.
What is one effect of a usury law is that it will? ›
Usury laws set limits on the amount of interest lenders can charge on loans and are typically set at the state level. There is no federally mandated maximum interest rate for credit cards. For credit cards, the CARD Act offers various protections and provides more transparency when it comes to rates.
What do usury laws impose? ›
Usury Law Implication Usury Law imposes price ceiling ie maximum interest rate in financial markets. It mandates maximum price of funds (ie interest) allowed in financial markets, usually below the equilibrium price, to protect the buying borrowers.
What is the maximum interest you can charge? ›
There's no federal regulation on the maximum interest rate that your issuer can charge you, though each state has its own approach to limiting interest rates. State usury laws often dictate the highest interest rate that can be charged on loans, but these often don't apply to credit card loans.
Do usury laws apply to private loans? ›
Usury laws apply to private loans that are made for credit cards, loans, and other reasons. Summary: The law limits the amount of interest that can be charged on a loan. Usury laws apply to private loans and all types of loans except commercial loans.
Is it illegal to charge too much interest? ›
An interest rate that exceeds the legal rate of interest is classified as usury. There are usually stiff penalties for usury in most states, such as fines or even the forfeiture of principal and/or interest.
Why is usury banned in Christianity? ›
In sum, early Christian doctrine prohibited usury, which was originally understood as a ban on charging any interest on any kind of loan. 62 Charging interest was understood as a violation of commutative justice because it robbed the borrower of the fruits of his own capital.
