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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
How Are Usury Laws?
Usury laws govern what amount of interest may be assessed on the loan. Usury laws specifically target those who charge too high rates for loans by establishing caps on the maximum amount of interest that can be levied. The laws are intended to protect the consumer.
The United States, individual states are accountable for establishing their individual usury laws.1 Although this kind of financial activity could fall under the commerce clause of the Constitution, Congress has not traditionally concentrated on usury. The federal government has considered the collection of usury through violent means a federal offense.2
Important Takeaways
The laws governing the use of money set limits on the amount of interest can be charged on many types of loans, such as credit cards or personal loans and payday loans.
The laws governing the securities market are mostly enforced and enforced by the states, and not at the federal scale.
Because the usury laws are enacted by the states, the laws differ based the state you reside in which means that interest rates may be drastically higher from one state to the next.
Certain banks are able to charge the highest rate allowed by the state in which they are incorporated as opposed to the state where you live–a practice that was made legal after a 1978 U.S. Supreme Court ruling.
In What Ways Usury Laws Are Circumvented
Credit card companies generally enjoy the advantage of being in a position to charge the interest rate allowed by the state where the company was established instead of adhering to the usury laws that apply in the states where the borrowers live. Nationally chartered banks can also use the highest rate of interest permitted by the state where the institution was established. By incorporating in states such as Delaware as well as South Dakota, such lenders have historically enjoyed greater leeway allowed by those states’ usury laws that are more flexible.
Delaware, in particular, is often chosen to be the place of incorporation of many financial institutions due to the flexibility that is granted to the payment of interest rates. The majority of domestic credit transactions on the U.S. market is conducted by corporations that have been were founded in Delaware, though they may maintain their operational headquarters in other states.
Special Takes into Account
There is some debate on the validity of the usury laws following decisions made by the U.S. Supreme Court and legislation gave financial institutions the capacity to circumvent the limits. The high court’s rulings regarding the decision in the case of Marquette National Bank v. First of Omaha Corp. permitted credit institutions to charge customers outside of the state with the same interest rates that they could charge in states where they were incorporated.3
Delaware’s adoption of the Financial Center Development Act, which substantially eliminated restrictions on interest and fees that could be charged to consumers who lend and further boosted the desire for financial institutions to relocate there.4 Banks simply had to create subsidiaries or satisfy certain conditions for incorporation within Delaware to be eligible for the law and avoid usury laws in other states. In response to this activity certain states have altered their usury laws to grant locally-based financial institutions the ability to charge rates of interest on a similar basis to lenders from outside the state.
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A legally-required rate of interest is a maximum set to prevent lenders from charging their borrowers excessive interest rates.
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