Usury
Usury is the practice of charging excessively high interest rates on loans, often exceeding legal limits set by jurisdiction. It typically exploits vulnerable borrowers, particularly those with poor credit or limited borrowing options, leading to significant financial strain. While usury is generally illegal, the regulation and enforcement of usury laws vary by state in the United States, as there is no federal standard governing interest rates. States have the authority to determine maximum allowable interest rates and may have exceptions based on loan type or lender category. Consumer protection laws, such as the Truth in Lending Act and the Fair Debt Collection Practices Act, aim to safeguard borrowers by ensuring transparent lending practices and prohibiting abusive collection methods. Despite these protections, companies may find ways to circumvent usury laws through various exceptions, allowing them to charge higher interest rates. This complex landscape highlights the importance for consumers to be aware of their state's regulations and the potential implications of usury in financial transactions.
Subject Terms
Usury
Usury refers to the act of charging an excessive rate of interest on a debt, or charging interest at a rate higher than what is permitted under any applicable law. Interest refers to the amount a lender charges a borrower for the use of funds. Interest is usually expressed as a percentage of the principal of the loan amount. Interest rates are typically stated on an annual basis and referred to as the annual percentage rate (APR).
Usury is illegal because it takes advantage of consumers with poor credit or those who may not have other options for borrowing funds. Usury unfairly enriches lenders at the expense of borrowers. In fact, in the popular lexicon, a lender who practices usury is sometimes called a loan shark.
Historically in the United States, usury is not regulated at the federal level. Instead, the individual states have the power to regulate usury practices within their borders. Each state has the discretion to specify the maximum allowable interest rate for different categories of lenders who operate within its borders.
This has not always worked to the advantage of consumers, as state laws vary and many exceptions exist. For example, credit card companies may be able to charge higher credit rates than allowed by the state in which consumers reside because the company itself is domiciled (based) in a state that does not regulate usury, or allows higher rates. It is important for consumers to check state laws carefully to understand what is considered usury on a state-by-state basis.
Consumer Protection Laws
The federal government does provide some overarching financial protection for consumers. The Federal Trade Commission (FTC) acts as the nation’s primary consumer protection agency. The Bureau of Consumer Protection, a division of the FTC, works to prevent fraudulent and unfair business practices in the marketplace, including those related to credit practices. The FTC handles consumer complaints about businesses that overcharge or otherwise cheat people out of money. They share this information with law enforcement and help investigate and shut down businesses that engage in fraudulent or unfair business and credit practices.
Although the federal government does not directly regulate usury, it has passed consumer protection laws to regulate credit practices and the terms of certain types of loans. In general, these consumer protection laws are meant to offer protection primarily for loans related to personal, family, or household use.
- The Truth in Lending Act (TILA) forces creditors to disclose their terms of credit in a meaningful, uniform manner. For example, credit card companies are required to state the cost of credit as both a dollar amount and an annual percentage rate (APR). This regulation is meant to help consumers compare credit offers and choose the one with the lowest interest or best terms.
- The Fair Debt Collection Practices Act (FDCPA) prohibits debt collectors from using abusive, unfair, or deceptive practices to collect monies owed by consumers.
- The Fair Credit Reporting Act (FCRA) protects consumers by ensuring that information on credit reports is current and accurate. The FCRA ensures that consumers have an avenue to address and correct inaccuracies and mistakes that may appear on their credit reports.
- The Equal Credit Opportunity Act (ECOA) prevents lenders, credit card companies, and others who offer credit from discriminating against consumers based on personal characteristics such as race, religion, national origin, sex, marital status, age, and so on. This law applies to any extension of credit, including to businesses, corporations, and trusts. Although this act does not establish specific credit standards for lenders, it does require them to apply their standards equally to all consumers they serve.
After the recession of the late 2000s, which was in part driven by shoddy lending practices and excessively high rates of interest on mortgages, Congress attempted to pass federal usury statutes to provide federal caps on interest rates. President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law in July 2010. The act seeks to regulate some credit practices but does not cap interest rates. However, it is of interest to consumers as it is meant to increase the government’s regulation of financial services in the United States in a general sense.
Usury laws can have serious legal implications for corporations that fail to follow their state’s guidelines. For example, Credit Acceptance Corporation was sued in 2023 by the Consumer Financial Protection Board and the New York Attorney General for manipulating consumers into taking out high-interest loans to buy pre-owned cars.
Usury Law Exceptions
Although most states have usury laws, they also allow companies to bypass these laws in a variety of ways. These are known as exceptions to usury law. Exceptions may be based on any number of criteria, such as the type of lender or borrower, the type of loan, the amount of the loan, or the nature of the contract. For example, in the state of Washington, several exceptions exist:
- Usury laws do not apply to loans made for commercial, agricultural, investment, or business purposes.
- Usury rates do not apply to credit card and other companies that offer retail credit. These credit companies can charge higher rates because "retail installment transactions" are not covered.
- "Most favored lenders," which is a status offered to certain banks and credit unions, are allowed to charge the highest mortgage rates offered in any other state on any given day.
Similar types of exceptions are common and applicable in other states. In effect, usury laws work more as general guidelines for transactions rather than specific limits on interest rates charged.
Bibliography
"Bureau of Consumer Protection." Federal Trade Commission, www.ftc.gov/about-ftc/bureaus-offices/bureau-consumer-protection. Accessed 2 Dec. 2024.
"Details on State Interest Rate Laws." FindLaw, 20 June 2016, statelaws.findlaw.com/consumer-laws/details-on-state-interest-rate-laws.html. Accessed 2 Dec. 2024.
"Dodd-Frank Act Becomes Law." Harvard Law School Forum on Corporate Governance and Financial Regulation, corpgov.law.harvard.edu/2010/07/21/dodd-frank-act-becomes-law. Accessed 2 Dec. 2024.
"Exceptions to the Usury Law." Financial Education Clearinghouse, Washington State Department of Financial Institutions, dfi.wa.gov/financial-education/information/exceptions-usury-law. Accessed 2 Dec. 2024.
Kenton, Will. "What Are Usury Laws?" Investopedia, 16 Jan. 2024, www.investopedia.com/terms/u/usury-laws.asp. Accessed 2 Dec. 2024.
Wells, Nicholas, and Mark Fahey. "Here’s What’s Going On with the Dodd-Frank Act." CNBC, 24 July 2015, www.cnbc.com/2015/07/24/heres-whats-going-on-with-the-dodd-frank-act.html. Accessed 2 Dec. 2024.