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Usury Laws: Definition, Purpose Regulation, and Enforcement
By Will Kenton
Updated July 18, 2022
Reviewed by Thomas Brock
Fact checked through Hans Daniel Jasperson
What Are Usury Laws?
Usury laws are regulations governing how much interest can be paid on an loan. These laws target specifically those who charge too high rates for loans by establishing caps for the amount that can be levied. These laws are intended to protect consumers.
The United States, individual states are in charge of deciding their own usury laws.1 Though this type of financial transaction could be a violation of the Commerce Clause of the Constitution, Congress has not traditionally concentrated on usury. The government does consider the collection of money through violent means to be a federal offense.2
Key Takeaways
Usury laws set the amount of interest is charged on various loans like credit cards and personal loans, or payday loans.
Usury laws are mostly regulated and enforced by the states, and not at an federal scale.
Because usury laws are determined by the states, the rules differ depending on where you live and, as a result, interest rates could be significantly higher in one state than the next.
Certain banks are able to charge the highest rate that is allowed in the state they are registered as opposed to the state in which you reside, a procedure that was made lawful after a 1978 U.S. Supreme Court ruling.
How Usury Laws Are Circumvented
Credit card companies generally have the benefit of being able to charge charges for interest that have been regulated by the state in which the company was incorporated rather than follow the usury laws that apply to the states in which the borrowers live. Nationally chartered banks similarly can use the highest rate of interest permitted by the state in which the institution was incorporated. Through incorporation in states such as Delaware or South Dakota, such lenders have traditionally enjoyed more flexibility granted by these states’ more relaxed laws on usury.
Delaware is a particular state that is frequently chosen to be the place of incorporation of many financial institutions due to the flexibility that is granted to the charging of interest rates. Around half of the credit transactions in the U.S. market is conducted by corporations that have been were founded in Delaware however, they can have their headquarters operating in other states.
Special Beacons
There is some debate on the validity of the usury laws following decisions made by the U.S. Supreme Court and legislation that gave financial institutions the power to circumvent the limits. The high court’s rulings regarding the decision in the case of Marquette National Bank v. First of Omaha Corp. allowed credit companies to charge customers outside of the state with the same interest rates they were able to charge in the states in which they were incorporated.3
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 loans to consumers and further boosted the desire of financial institutions to establish a branch there.4 Banks simply had to establish subsidiaries or meet other terms for incorporation in Delaware to be eligible for the law and thereby circumvent the usury laws of other states. To counter this activity certain states have modified their laws on usury to grant locally-based banks the right in charging interest that are on similar basis to lenders from outside the state.
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