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.
