Anaya Nolan
Usury is the practice of lending money at an interest rate that is considered unreasonably high or higher than the rate permitted by law. The term is used in both a moral and legal sense, with the former condemning the act of taking advantage of others' misfortune, and the latter referring to interest rates that exceed the maximum rate allowed by law. Usury laws are enforced by individual states in the US, with no federal laws in place to cap credit card interest rates. These laws aim to protect consumers from predatory lending and excessive interest rates, with rates varying from state to state. However, the effectiveness of usury laws is often debated, especially in light of decisions by the US Supreme Court and legislative actions that have allowed financial institutions to circumvent these limits.
| Characteristics | Values |
|---|---|
| Definition of Usury | The practice of making loans that are seen as unfairly enriching the lender |
| History of Usury Laws | The first usury laws were adopted by 18th-century American colonies, setting the interest cap at 8%. |
| Usury Laws in the U.S. | Individual states set their own usury laws and enforce them. Each state has different usury interest rate caps. |
| Exceptions to Usury Laws | Certain types of loans and institutions are exempt from usury laws, such as commercial, agricultural, investment, or business loans. Credit card companies may also be exempt if they comply with specific regulations. |
| Criticism of Usury Laws | Critics argue that usury laws have been rendered irrelevant due to federal actions and court rulings, allowing credit card companies to charge high-interest rates. |
| Global Perspective | Usury laws vary globally, with countries like Canada having a federal limit on interest rates, while some religions and societies prohibit usury altogether. |
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What You'll Learn
Usury law exceptions
Usury laws, which govern the interest charged on loans, vary from state to state in the United States. While these laws aim to protect consumers from predatory lending and high-interest rates, there are several exceptions where the usury law does not apply.
One notable exception is that usury laws generally do not apply to loans made for commercial, agricultural, investment, or business purposes. In these cases, borrowers cannot claim a defence of usury against the lender, even if the interest rates exceed the state's usury law. Similarly, credit card debt and other retail instalment debts often exceed the maximum interest rate allowed by usury laws. This is because usury laws typically do not apply to "retail instalment transactions," which include various types of credit agreements and cards.
Another exception to usury laws involves federal preemption. Federal law takes precedence over state usury laws in certain cases, such as for most first lien mortgage loans. Additionally, loans insured by any U.S. government agency or provided by a regulated lender are generally exempt from state usury laws.
Bona fide credit sales, where the buyer agrees to pay at a later date, are also exempt from usury laws. Transactions where a seller finances the purchase of property and charges a premium for that financing are not subject to usury restrictions. Loans made by licensed pawnbrokers within the scope of their license and loans for joint ventures between lenders and borrowers are also exceptions.
It is worth noting that credit card issuers can charge higher rates than usury laws allow by complying with specific regulations governing lender credit card agreements. Additionally, consumer leasing of personal property, such as automobiles and furniture, may result in consumers being unable to raise a claim of usury.
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Consumer protection
Usury laws are designed to protect consumers from predatory lending and unreasonably high-interest rates. In the United States, individual states are responsible for setting their own usury laws, resulting in different interest rate caps across the country. These laws govern the interest charged on loans, setting a limit on how much interest can be charged.
The first usury laws were adopted by 18th-century American colonies, setting an interest rate cap at 8%. Since then, usury laws have evolved, and today, they vary by loan amount, loan type, and issuing institution, depending on the state. Some states apply uniform laws across all loan types, while others impose different rates on judgments, written loan agreements, mortgages, business loans, educational loans, and other loan categories. For example, Virginia's regulations allow a maximum interest rate of 12% per year for loans with written contracts, while North Dakota's usury rate is calculated as 5.5% higher than the current cost of money reflected by US Treasury Bills, with a minimum of 7%.
However, there are several exceptions to usury laws. For instance, Washington State's usury law does not apply to loans permitted under federal law, certain tax-qualified retirement plans, or delinquent property taxes. Additionally, credit card companies often charge interest rates that are allowed by the state where the company is incorporated, rather than following the usury laws of the borrower's state, due to a 1978 Supreme Court ruling in Marquette National Bank of Minneapolis vs. First of Omaha Service Corp. This has resulted in a lack of interest rate caps for credit cards, with the highest rates reaching 36%.
The effectiveness of usury laws is often debated, and there have been efforts to restore states' ability to limit consumer loan interest rates. While usury laws aim to protect consumers, it is essential for individuals to practice responsible spending and build a financial safety net to protect themselves from unreasonably high-interest rates.
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Religious views on usury
The religious views on usury have evolved over time, with various religious traditions holding different perspectives. Here is an exploration of the religious views on usury:
Christianity
Christianity has historically taken a critical stance against usury, considering it a sin. In medieval Europe, the Catholic Church forbade the charging of interest at any rate, deeming it exploitative and unjust. This belief was shared by Reformed Churches as well. The Bible, particularly in the Old Testament, provides guidance on the matter. For instance, Leviticus 25:35-38 and Deuteronomy 23:19 prohibit the Israelites from charging interest on loans to their fellow Jews, encouraging lending without expecting anything in return. However, loans to foreigners were treated as international business and permitted. Additionally, the Bible cautions against an excessive love of money (1 Timothy 6:9-10) and the potential for wealth to lead to despair (Matthew 6:24).
Over time, the Christian perspective on usury has evolved. While the act of lending at interest was once considered deplorable, it is no longer seen as a sin by many Christians. This shift can be attributed to various factors, including the decline in the influence of religion and the rise of capitalism.
Judaism
In Judaism, there is a complex history surrounding usury. The law of Moses prohibited Jews from charging interest to their brethren but allowed them to take interest from foreigners. This distinction arose from the agricultural nature of Jewish society, where loans were made to friends and family in need rather than for business purposes. However, during captivity, the practice of mortgaging land at exorbitant interest rates emerged among Jews, which directly violated their religious laws. Several historical rulings in Jewish law have mitigated the allowances for usury towards non-Jews, reflecting a nuanced approach to the issue.
Islam
Islam has consistently viewed usury as morally and ethically wrong. The Prophet Muhammad argued against requiring interest in transactions, and the Quran explicitly states, "O you who believe! Eat no Riba (usury)" (Al Imran 3:130). Muslims regard usury as the exploitation of the poor and detrimental to society. This belief is further supported by the Hadith, which provide guidance on how Muslims should lead their lives.
Ancient Societies
In ancient societies, including those in the Near East, Greece, and Rome, views on usury varied. While some societies, like the Mesopotamians, Hittites, Phoenicians, and Egyptians, legalised interest and fixed rates, others, influenced by Aristotelian philosophy, condemned it. Aristotle distinguished between natural and unnatural exchange, with the latter being associated with the acquisition of wealth.
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State-by-state usury laws
Usury laws are state laws that govern interest rates to protect consumers from predatory lending and high-interest rates. These laws set a limit on how much interest can be charged on a loan and are enforced by individual states rather than at a federal level. Interest rate limitations can vary from one state to another.
In the United States, individual states are responsible for setting their own usury laws. The Conference of State Bank Supervisors (CSBS) has developed a 50-state Consumer Finance Laws Survey tool that provides a clear overview of the similarities and differences in compliance requirements across states, including applicable allowable interest rates. This tool is particularly useful for financial companies and consumers, as it allows them to assess and compare compliance requirements and make informed decisions about their operations and growth opportunities.
While usury laws are designed to protect consumers, there are instances where exceptions apply. For example, in Washington State, the usury law does not apply to loans made for commercial, agricultural, investment, or business purposes. Additionally, credit card issuers are exempt from complying with the general usury law if they adhere to specific regulations governing lender credit card agreements.
The effectiveness of usury laws is often a subject of debate, and certain decisions, such as the Marquette National Bank v. First of Omaha Corp. case, have allowed credit companies to charge customers out-of-state interest rates based on the state where they are incorporated. Delaware's Financial Center Development Act further highlighted this issue by eliminating limits on fees and interest rates for consumer lending. These developments have led to efforts by US senators to introduce acts like the Empowering States' Rights to Protect Consumers Act, aiming to restore states' ability to limit consumer loan interest rates and address the growing debt burden on consumers.
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Supreme Court rulings on usury
The most notable Supreme Court ruling on usury is the 1978 case of Marquette National Bank of Minneapolis v. First of Omaha Service Corp. This case concerned a Minnesota-chartered national banking association, Marquette, suing Omaha Bank, based in Nebraska, over its BankAmericard program. Marquette argued that Omaha Bank was violating Minnesota's usury law, which capped interest rates at 12%. Omaha Bank was charging its Minnesota cardholders interest rates permitted by Nebraska law, but which exceeded Minnesota's cap.
The Supreme Court ruled in favour of Omaha Bank, stating that state usury laws do not apply to nationally chartered banks based in other states. The Court's decision was based on a broad interpretation of the National Bank Act, a federal law passed in 1864 (or 1863 according to Justice William Brennan). This Act allows nationally chartered banks to export the interest rates allowed in their home state to customers in other states. This ruling set a precedent for credit card companies to charge interest rates that exceed a customer's state usury law.
Another important case regarding usury is Smiley v. Citibank, which also involved the National Bank Act. In this case, Barbara Smiley filed a class-action lawsuit against Citibank's South Dakota-based credit card division, arguing that a $15 late fee she was charged violated California state law. The Supreme Court ruled in favour of Citibank, agreeing that the late fee constituted interest and was covered under the National Bank Act. This decision led to an increase in late fees charged by credit card companies.
In addition to federal Supreme Court rulings, individual state Supreme Courts have also issued interpretations of usury laws. For example, the Texas Supreme Court held that the "actuarial method" must be used to determine whether a commercial loan's interest rate is usurious under Texas law. This method calculates interest using the loan's declining principal balance.
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Frequently asked questions
Usury is lending money at an interest rate that is unreasonably high or higher than the rate permitted by law.
Usury laws protect consumers by governing the interest charged on a loan. These laws set a limit on how much interest can be charged on a variety of loans.
In Virginia, the highest permissible rate a lender can charge a borrower is 12% per year for a loan with a written contract. In Washington State, usury law does not apply to loans permitted under applicable federal law and regulations from a tax-qualified retirement plan.
Yes, there are several exceptions to usury laws. For example, in Washington State, usury law does not apply to debts related to "retail installment transactions". Additionally, nationally chartered banks can "export" the interest rates allowed in their own states to customers throughout the country.
