Usury Laws

Usury Laws

Usury laws are regulations governing the amount of interest that can be charged on a loan. Some banks charge the maximum rate that is allowed in the state in which they are incorporated, as opposed to the state where you live — a practice that was legalized following a 1978 U.S. Supreme Court ruling. Credit card companies typically have the benefit of being able to charge interest rates that are allowed by the state where the company was incorporated rather than follow the usury laws that apply in the states where borrowers live. The high court’s decisions in the case of Marquette National Bank v. First of Omaha Corp. allowed credit companies to charge customers who were out of state at the same interest rates the companies could charge in the states where they were incorporated. In response to this activity, some other states changed their usury laws to grant locally-based financial institutions the ability to charge interest rates on a par with out-of-state lenders. Because usury laws are determined by the states, the laws vary depending on where you live; as a result, interest rates may be drastically higher from one state to the next.

Usury laws set a limit on how much interest can be charged on a variety of loans, such as credit cards, personal loans, or payday loans.

What Are Usury Laws?

Usury laws are regulations governing the amount of interest that can be charged on a loan. Usury laws specifically target the practice of charging excessively high rates on loans by setting caps on the maximum amount of interest that can be levied. These laws are designed to protect consumers.

In the United States, individual states are responsible for setting their own usury laws. Though this type of financial activity could fall under the Constitution's commerce clause, Congress has not traditionally focused on usury. The government does consider the collection of usury through violent means a federal offense.

Usury laws set a limit on how much interest can be charged on a variety of loans, such as credit cards, personal loans, or payday loans.
Usury laws are mostly regulated and enforced by the states, rather than on a federal level.
Because usury laws are determined by the states, the laws vary depending on where you live; as a result, interest rates may be drastically higher from one state to the next.
Some banks charge the maximum rate that is allowed in the state in which they are incorporated, as opposed to the state where you live — a practice that was legalized following a 1978 U.S. Supreme Court ruling.

How Usury Laws Are Circumvented

Credit card companies typically have the benefit of being able to charge interest rates that are allowed by the state where the company was incorporated rather than follow the usury laws that apply in the states where borrowers live. Nationally chartered banks similarly can apply the highest interest allowed by the state where the institution was incorporated. By incorporating in states such as Delaware or South Dakota, such lenders have historically benefited from greater leeway allowed by those states’ relaxed usury laws.

Delaware, in particular, is frequently chosen as the state of incorporation for many financial institutions because of the freedom allowed regarding the charging of interest rates. About half of the domestic credit business in the U.S. market is conducted by companies that incorporated in Delaware, though they may maintain their operational headquarters in other states.

Special Considerations

There is some debate on the effectiveness of usury laws after decisions by the U.S. Supreme Court and legislation gave financial institutions the capacity to circumvent the limits. The high court’s decisions in the case of Marquette National Bank v. First of Omaha Corp. allowed credit companies to charge customers who were out of state at the same interest rates the companies could charge in the states where they were incorporated.

Delaware’s introduction of the Financial Center Development Act, which largely eliminated limits in the state on fees and interest that can be charged on consumer lending, further amplified the desire among financial institutions to move there. Banks simply had to establish subsidiaries or meet other terms for incorporation in the state to benefit from the law and thereby circumvent usury laws in other states. In response to this activity, some other states changed their usury laws to grant locally-based financial institutions the ability to charge interest rates on a par with out-of-state lenders.

Related terms:

Delaware Corporation

A Delaware corporation enjoys the benefits of being registered in the state of Delaware but can conduct business in any state. read more

Domestic Corporation

A domestic corporation is a business that conducts its affairs in its home country, or in the state where it was incorporated. read more

Legal Rate of Interest

A legal rate of interest is a limit set to prevent lenders from charging borrowers excessive interest rates. read more

Truth in Lending Act (TILA)

The Truth in Lending Act (TILA) is a federal law enacted in 1968 to help protect consumers in their dealings with lenders and creditors. read more

Uniform Consumer Credit Code (UCCC)

The Uniform Consumer Credit Code (UCCC) provides guidelines for laws related to the purchase and use of all types of credit products. read more

Unlawful Loan

An unlawful loan is a loan that fails to comply with lending laws, such as loans with illegally high interest rates or those that exceed size limits.  read more

Usury

Usury is the act of lending money at an interest rate that is considered unreasonably high or that is higher than the rate permitted by law.  read more