Usury laws are in place to prevent lenders from charging borrowers excessively high rates of interest on loans. While more than half of US states have usury laws, they do not apply to most credit cards due to deregulation that began in the 1970s. This means that credit card companies can charge customers the interest rates allowed by the company's home state, regardless of the borrower's location. For example, credit card companies based in South Dakota or Delaware, which have weak or no usury laws, can charge interest rates with no upper limit.
Characteristics | Values |
---|---|
Do usury laws apply to credit cards? | No, there is no federal limit on the interest rate a credit card company can charge. However, there are federal laws that set rate caps for service members. |
Which laws govern interest rates for credit cards? | The law of the state where the credit card company has its headquarters determines the maximum interest rate the card issuer can charge. |
How do credit card companies determine the interest rate to charge? | Credit card companies charge interest rates that are allowed by the state where the company was incorporated. |
Are there any states with weak or no usury laws? | Yes, Delaware and South Dakota are commonly chosen as the states of incorporation for financial institutions due to the freedom allowed regarding interest rates. Nevada also has no usury limits. |
What is the impact of usury laws on non-bank lending companies? | Usury regulations apply to non-bank lending companies such as payday lenders, and these companies must comply with the usury law of the state where the borrower resides. |
What You'll Learn
The Marquette decision and its consequences
The Marquette decision, or Marquette National Bank of Minneapolis v. First of Omaha Service Corp., was a unanimous 1978 US Supreme Court ruling that state anti-usury laws regulating interest rates cannot be enforced against nationally chartered banks based in other states. In other words, the decision allowed nationally chartered banks to "export" their home state's interest rates to out-of-state customers.
The consequences of the Marquette decision were significant and wide-ranging. Firstly, it freed nationally chartered banks to offer credit cards to anyone in the US they deemed qualified, and allowed them to export credit card interest rates to states with stricter regulations. This led to a race between states to attract lending institutions, resulting in many states repealing or loosening their anti-usury laws to keep up with the competition. As a result, the use of credit cards increased rapidly, and the mortgage industry soon followed suit.
The decision also had a significant impact on the credit card industry itself. With the deregulation of interest rates, there was no longer any cap on credit card interest rates. This led to increased competition in the credit card market and made it easier for more consumers to access credit. However, it also resulted in a rise in consumer debt, as Americans' overall debt levels soared in the following decades. The extension of consumer credit availability, often referred to as the "democratization of credit," also led to an increase in bankruptcy filings.
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The Military Lending Act
I am unable to perform a search without a query, but here is some information on the Military Lending Act:
Under the MLA, creditors cannot charge a military annual percentage rate (MAPR) greater than 36% on consumer credit extended to covered borrowers, which includes not only the interest but also fees and other charges associated with the loan. This cap applies to various types of consumer credit, including credit card accounts, payday loans, vehicle title loans, and tax refund anticipation loans.
The MLA also provides additional protections for military borrowers, such as prohibiting mandatory arbitration clauses, requiring certain disclosures and oral statements, and providing a mechanism for resolving disputes. Creditors are required to verify the military status of applicants to ensure compliance with the MLA's provisions.
The scope of the MLA is broad, covering not only traditional financial institutions but also online lenders, payday lenders, and other non-bank entities. The law applies to active-duty service members in the Army, Navy, Air Force, Marine Corps, and Coast Guard, as well as members of the National Guard called to active duty for more than 30 consecutive days, and their spouses and dependent children.
Violations of the MLA can result in various penalties, including enforcement actions by regulators, private lawsuits, and damages. The law also provides for certain safe harbors and exceptions, such as for residential mortgages and purchase-money loans. Overall, the MLA aims to provide strong protections for military families and ensure they receive fair and equitable treatment in the consumer credit market.
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The Servicemembers Civil Relief Act (SCRA)
The SCRA offers several protections to service members, including:
- Reducing the interest rate on pre-service loans and credit card debt to a maximum of 6%. This protection applies during active duty service and for an additional year after the end of service.
- Protections against default judgments in civil cases. The SCRA establishes procedures that must be followed to protect service members from default judgments, including the requirement for the plaintiff to file an affidavit stating whether the defendant is in the military.
- Protections against foreclosure on their homes. Service members cannot be foreclosed on without a court order while on active duty and for one year after leaving active duty.
- Protections against repossession of their property. Creditors cannot repossess personal property, including vehicles, without a court order if certain conditions are met.
- Termination of residential and automobile leases without penalty. Service members have the right to terminate residential and automotive leases if they are transferred after the lease is made.
The SCRA also applies in bankruptcy cases, providing protection to service members against default judgments and allowing for the suspension of proceedings against military debtors.
The purpose of the SCRA is to strengthen national defense by enabling service members to devote their full attention to their duties without the stress of financial and legal obligations. The protections provided by the SCRA allow service members to focus their energy on defending the nation.
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The Credit CARD Act
The Act was passed in response to dangerous practices in the credit card industry, such as hidden fees, unpredictable interest rates, and unsustainable promotions, which were causing irreparable damage to the trust between credit card companies and their customers.
- Rate increase restrictions: Credit card issuers must alert customers at least 45 days in advance of any interest rate hikes and inform them of their right to cancel before the new rate takes effect.
- Limits on late fees: Late fees are capped at $30 for the first late payment and $41 for subsequent late payments within six billing cycles.
- Restrictions on over-limit fees: Consumers can opt-in to over-limit charges, or their cards will be declined when they go over the credit limit.
- No double-cycle billing: Prohibits credit card issuers from calculating interest charges based on the average daily balance of the previous two billing cycles, ensuring cardholders don't pay interest on charges they have already paid off.
- Protections for young consumers: The Act restricts card issuers from targeting consumers under the age of 21. It also requires card issuers to cease marketing towards college students unless they opt-in.
However, it's important to note that the Credit CARD Act does not cap the maximum interest rate a credit card issuer can charge. While the Act provides protections for consumers, it does not eliminate all concerns, and some less desirable practices are still allowed.
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The role of state legislatures
State legislatures play a crucial role in regulating usury laws, which are designed to prevent predatory lending practices and protect consumers from excessively high interest rates. These laws vary from state to state, with each state legislature setting its own maximum allowable interest rates for different types of loans and financial transactions. For example, California has set its general usury limit at 10%, while Florida's is 12%.
While usury laws are intended to protect consumers, they have limited effect on most credit cards due to effective deregulation that began in the 1970s. The Marquette National Bank v. First of Omaha Service Corp. case in 1978 played a significant role in this. The U.S. Supreme Court ruled that nationally chartered banks could charge customers the interest rates allowed by the company's home state, regardless of the customer's state. This decision was further solidified by the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), which allowed all federally insured banks to charge out-of-state customers the highest rate permitted in their home state.
As a result, state legislatures passed laws allowing local banks to charge similar interest rates as out-of-state banks, effectively removing interest rate caps for credit cards. However, it's important to note that usury laws still apply to non-bank lending companies, such as payday lenders, and play a crucial role in regulating interest rates for various loan types, including consumer loans, real estate financing, and business loans.
In summary, while state legislatures have a significant role in establishing and enforcing usury laws, the applicability of these laws to credit cards has been diminished due to court decisions and federal statutes. Nonetheless, these laws continue to protect consumers from excessively high interest rates in other lending sectors.
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Frequently asked questions
Usury laws are set by individual states to limit the interest rate that can be charged on loans. However, they do not apply to most credit cards. Credit card companies can charge customers the interest rates allowed by the company's home state, regardless of the state the customer lives in.
There is no federal limit on the interest rate a credit card company can charge. The highest credit card interest rate currently stands at 36%, which is considered usurious under many states' laws, but is still legal.
The best way to protect yourself is to stay informed about your federally guaranteed rights to interest rate disclosures and other protections. Carefully read the fine print on any financial contract and get the lender or credit card issuer to explain any unclear terms.