Usury Laws: Do They Apply To Individuals?

Usury laws are interest rate laws that prevent lenders from charging excessively high rates on loans. These laws are designed to protect borrowers from predatory lending practices and often vary by state. Usury is lending money at an interest rate that is unreasonably high or higher than the rate permitted by law. While usury laws are enforced by individual states in the US rather than at a federal level, federal regulations can override state usury laws, especially for national banks.

Usury laws and predatory lending

Usury is the act of lending money at an interest rate that is unreasonably high or above the rate permitted by law. Usury laws, which set a limit on how much interest can be charged on loans, are enforced by individual states in the US rather than at the federal level. These laws aim to protect consumers from predatory lending and high-interest rates.

Predatory lending is defined by the Federal Deposit Insurance Corporation (FDIC) as "imposing unfair and abusive loan terms on borrowers". Predatory lenders charge unreasonably high-interest rates and require significant collateral. They often target vulnerable groups with less access to and understanding of traditional forms of financing, such as communities of colour, veterans, students, senior citizens, and the working poor. Predatory lending practices include subprime mortgages, payday loans, and car title loans.

While Congress has passed some federal credit laws, many states have taken the initiative to curb predatory lending by capping interest rates, banning discriminatory practices, and outlawing certain types of lending. However, the effectiveness of usury laws is often debated, as financial institutions can find ways to circumvent limits. For example, credit card companies can charge interest rates allowed by the state where they are incorporated rather than following the usury laws of the borrower's state.

To address these challenges, lawmakers have proposed various reforms, including capping interest rates and restoring state powers to cap interest rates. These efforts aim to strike a balance between protecting consumers from predatory lending and ensuring access to credit for those who need it.

Usury laws by state

Usury laws are interest rate laws designed to prevent lenders from charging borrowers excessively high rates on loans. These laws are enforced by individual states in the US and vary from state to state.

• Alabama: Section 8-8-1
• Alaska: Statute 45.45.010
• Arizona: Statute 44-1201
• California: Usury Section 1
• Colorado: Statute 5-12
• Connecticut: Section 37-4
• Delaware: Section 2301
• Georgia: Section 7-4-2
• Hawaii: Statute 478-2
• Idaho: Statute 28-22-104
• Illinois: Chapter 17 Section 4
• Indiana: Code 24-4.5-3-201
• Kansas: Article 16-201
• Kentucky: Statute 360.010
• Louisiana: Statute 9:3500
• Maine: Chapter 43 Statute 432
• Massachusetts: Section 3
• Michigan: Section 438.31
• Minnesota: Statute 334.01
• Mississippi: Section 75-17-1
• Missouri: Statute 408.030
• Montana: Statute 31-1-107
• Nebraska: Statute 45-101.03
• Nevada: Statute 99.04
• New Hampshire: Section 336:1
• New Jersey: Section 31:1-1
• New Mexico: Section 56-8-3
• New York: Section 5-501
• North Carolina: Statute 24-1
• North Dakota: Statute 47-14-05
• Ohio: Chapter 1343.01
• Oklahoma: Section 266
• Oregon: Statute 82.010
• Pennsylvania: Statute 201
• Rhode Island: Statute 6-26-01
• South Carolina: Section 34-31-20
• South Dakota: Statute 54-3-1.1
• Tennessee: Statute 47-14-103
• Texas: Section 302.001
• Utah: Statute 15-1-1
• Vermont: Statute 41a
• Virginia: Statute 6.2-301
• Washington: Code 19.52.010
• Washington DC: Statute 28-3301
• West Virginia: Statute 47-6-5
• Wisconsin: Statute 138.04
• Wyoming: Statute 40-14-106

The usury limit for non-consumers in some states is 5% above the Federal Reserve interest rate. For example, California has set its general usury limit for non-consumers at more than 5% greater than the Federal Reserve interest rate. On the other hand, states like Arkansas and Colorado allow for higher rates under certain circumstances.

While usury laws are enforced at the state level, they do not apply to credit cards. Credit card companies charge interest rates that are allowed by the state where the company was incorporated, regardless of the borrower's location.

The history of usury

The concept of usury has a long historical life, and throughout most of it, it has been understood to refer to the practice of charging financial interest in excess of the principal amount of a loan. However, in more recent times, it has been interpreted as interest above the legal or socially acceptable rate. The practice of usury can be traced back to approximately four thousand years, and during its subsequent history, it has been repeatedly condemned, prohibited, scorned, and restricted, mainly on moral, ethical, religious, and legal grounds.

Ancient India

Among the oldest known references to usury are those found in ancient Indian religious manuscripts. The earliest such record comes from the Vedic texts of Ancient India (2,000–1,400 BC), in which the usurer (kusidin) is mentioned several times and interpreted as any lender at interest. More frequent and detailed references to interest payment are found in the later Sutra texts (700–100 BC) and the Buddhist Jatakas (600–400 BC). It is during this period that the first sentiments of contempt for usury are expressed.

Ancient Western Political Philosophy

Among the Ancient Western philosophers who condemned usury were Plato, Aristotle, the two Catos, Cicero, Seneca, and Plutarch. Evidence that these sentiments found their concurrent manifestation in the civil law of that period can be seen from the Lex Genucia reforms in Republican Rome (340 BC), which outlawed interest altogether. Nevertheless, in practice, ways of evading such legislation were found, and by the last period of the Republic, usury was once again common.

Islam

The criticism of usury in Islam was well-established during the Prophet Mohammed's life and reinforced by various teachings in the Quran, which date back to around 600 AD. The original word used for usury in this text was riba, which means excess or addition, and was accepted to refer directly to interest on loans.

Judaism

Criticism of usury in Judaism has its roots in several Biblical passages in which the taking of interest is either forbidden, discouraged, or scorned. The Hebrew word for interest is neshek, which means "a bite" and is believed to refer to the exaction of interest from the debtor's perspective. In the associated Exodus and Leviticus texts, the word almost certainly applies only to lending to the poor and destitute, while in Deuteronomy, the prohibition is extended to include all money lending, excluding only business dealings with foreigners.

Christianity

Despite its Judaic roots, the critique of usury was most fervently taken up as a cause by the institutions of the Christian Church, where the debate prevailed with great intensity for well over a thousand years. The Old Testament decrees were resurrected, and a New Testament reference to usury was added to fuel the case. Building on the authority of these texts, the Roman Catholic Church prohibited the taking of interest by the clergy in the fourth century AD, a rule which they extended to the laity in the fifth century. In the eighth century, under Charlemagne, usury was declared a general criminal offence. This anti-usury movement continued to gain momentum during the early Middle Ages and perhaps reached its zenith in 1311 when Pope Clement V made the ban on usury absolute and declared all secular legislation in its favour null and void.

Usury laws and state economies

Usury laws, which are interest rate laws, vary from state to state in the US. They are enforced by individual states rather than at a federal level. Usury laws are designed to protect consumers from predatory lending and high-interest rates.

In the absence of federal regulation, the Marquette decision in 1978 allowed nationally chartered banks to charge the legal interest rates in their home states and "export" those rates to out-of-state customers. This led to a boost in economic growth in states that repealed their usury laws, such as South Dakota and Delaware, as they attracted banks and credit card companies with the promise of more jobs. However, the cost was high, with cardholders willing to pay excessive interest rates on credit cards, even after inflation subsided. This extension of consumer credit availability, often referred to as the "democratization of credit," led to a rise in bankruptcy filings and high consumer debt levels in the following decades.

In 2023, US Senators 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 in consumer loan and credit card debt.

Usury laws and the credit card industry

Usury laws are designed to protect consumers by preventing lenders from charging unreasonably high interest rates on loans. While more than half of US states have usury laws in place, they do not apply to most credit cards due to deregulation that began in the 1970s. This means that there is no cap on credit card interest rates in the US, and credit card companies can charge customers the interest rates allowed by the company's home state, regardless of the state in which the customer resides.

The deregulation of credit card interest rates began with the Marquette National Bank v. First of Omaha Service Corporation case in 1978. The case involved a Minnesota-based bank that was subject to a 12% interest rate cap under state law and a Nebraska-based bank that could charge up to 18% under Nebraska law. The Supreme Court ruled that nationally chartered banks could charge the legal interest rates in their home states and "export" those rates to out-of-state customers. This interpretation of the National Bank Act of 1864 effectively exempted credit card companies from state usury laws.

The Marquette ruling was followed by the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) in 1980, which allowed all FDIC-insured banks, including state-chartered banks, to charge out-of-state customers the highest interest rate allowed in their home state. This led to the erosion of state usury laws, as most states passed laws allowing local banks to charge the same interest rates as out-of-state banks.

The absence of usury laws for credit cards has led to increased access to credit for consumers, but it has also contributed to soaring debt levels in the US. The highest credit card interest rates are currently around 36%, which is much higher than the 24% cap set by states with tighter usury limits. While this rate is considered usurious under many state laws, it is legal as long as it is disclosed in the cardholder agreement and agreed to by the customer.

While there is no federal cap on credit card interest rates, consumers are protected by the Credit Card Accountability, Responsibility, and Disclosure Act (Credit CARD Act) of 2009, which requires credit card companies to notify cardholders in advance of any rate increases.

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