Usury has been the subject of both debate and scorn for centuries. When Shakespeare wrote “The Merchant of Venice” in the 16th century, the character Shylock had to forsake usury in order to gain admittance to heaven.
It is no wonder that most states enacted usury laws to protect their citizens. Now, however, the protection is largely gone.
Usury laws still exist in most states, although they can be confusing. While generally fixed, they can in some cases be tied to variable factors such as the U.S. Treasuries Security Rate. Then the allowable rate can vary according to the dollar figure and the type of contract.
The fixed portion can vary greatly. In Arkansas, for instance, the cap on interest rates for consumers is 17%, while in Idaho it’s 12% and in Alabama it’s 6%.
How then, can credit card companies charge as much as 29.9%?
Because usury laws don’t apply to banks, savings and loan institutions, or credit unions – thus they don’t apply to credit cards.
In 1978 the Supreme Court ruled that national banks could charge the highest interest rate allowed in that bank’s home state. Since states such as Delaware and South Dakota have nonexistent usury laws, all these banks needed to do was claim one of those states as “home.” It no longer mattered in which state the borrower resided.
Then, in 1980 the Depository Institutions Deregulation and Monetary Control act gave state-chartered banks the same rights. Under this law, all federally insured banks, including state chartered banks, may charge out of state consumers the highest rate permissible in the state, district, or territory that the bank calls home.
Then, in 1999, when President Clinton signed the Gramm-Leach-Biley Act into law, the final restrictions in Arkansas fell. This law allowed Arkansas banks to charge the greater of their own state’s usury limit, or the highest rate charged by an out-of-state bank with a branch in that state.
Other states, acting under the terms of the DIDMC act, soon followed. State legislatures across the country passed “wild-card parity statutes” that allowed their own state banks the same privilege.
Thus, while usury laws are on the books, they don’t mean much. Usury law limits simply don’t apply to banks any more.
If you’re looking for a cap on interest rates, look toward a credit union. The National Credit Union Administration currently sets the usury limit for federally chartered credit unions at 18% – without regard to the state in which the credit union is located.
State usury laws still do apply to commercial transactions by non-banking entities
Author: Mike Clover
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