What Are Usury Laws?
Let me explain usury to you directly: it's when someone lends money at an interest rate that's unreasonably high or exceeds what's legally allowed. Usury laws are there to protect you as a consumer by regulating the interest charged on loans. In the United States, each state handles its own usury laws. Even though this could tie into the Constitution's commerce clause, Congress hasn't traditionally stepped in at the federal level.
Key Takeaways on Usury Laws
You need to know that usury laws establish a ceiling on the interest that can be charged on different types of loans. These laws get enforced by states, not federally. And remember, the limits on interest rates differ from state to state, so what’s okay in one place might not be in another.
Examples of Usury Laws By State
Credit card companies base their interest rates on the state where they're incorporated, not where you live as the borrower. The same goes for nationally chartered banks—they can use the highest rates permitted in their incorporation state. That's why many financial institutions choose Delaware or South Dakota for incorporation; those states offer a lot of freedom on interest rates. Nevada has no usury limits at all. In Pennsylvania, anything over 25% is considered criminal usury. New Jersey sets a general limit of 30% for individuals and 50% for corporations.
Important Developments
In 2023, the Consumer Financial Protection Bureau and the New York Attorney General took action against Credit Acceptance Corporation. They sued for misrepresenting credit costs and deceiving customers into high-cost loans for used cars. This highlights ongoing issues in the industry.
Legislation Surrounding Usury
The debate on usury laws' effectiveness heated up after U.S. Supreme Court decisions and new legislation that let financial institutions bypass limits. The Court's ruling in Marquette National Bank v. First of Omaha Corp. allowed credit companies to charge out-of-state customers the rates permitted in their incorporation state. Delaware's Financial Center Development Act removed limits on fees and interest for consumer lending, making it a prime spot for institutions to relocate. In 2023, Senators Sheldon Whitehouse, Jack Reed, Elizabeth Warren, Bernie Sanders, and Jeff Merkley proposed the Empowering States’ Rights to Protect Consumers Act. This aims to give states back the power to cap consumer loan interest rates and tackle the massive debt from loans and credit cards.
What Is Predatory Lending?
Predatory lending, as defined by the FDIC, means imposing unfair and abusive terms on borrowers. These lenders hit you with excessively high interest rates and demand substantial collateral, which can trap you in debt.
When Were Usury Laws First Enacted in the United States?
The earliest usury laws in the US came from the 18th-century American colonies, where they capped interest at 8%.
How Does the CFPB Help Prevent Usury?
The CFPB spots abusive practices against consumers. Through the 2010 Consumer Financial Protection Act passed by Congress, the CFPB, along with federal regulators and states, can identify and go after companies engaging in abusive acts or practices.
The Bottom Line
Usury laws are designed to shield you from predatory lending and exorbitant interest rates. States in the US set these laws individually. The first ones appeared in the 18th-century colonies, and they've evolved since then.
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