Usury is the practice of charging extravagant or unlawfully high interest rates on loans. It has been seen as immoral or even illegal in many jurisdictions.
Usury may be used by real estate brokers when they participate in actions such as charging their customers unnecessarily large fees or commissions. In rare situations, a real estate broker may be charged with usury if they lend their customers excessively high interest rates.
The History of Usury
Usury has a lengthy history that dates back to antiquity. Lending money at interest was frowned upon or even banned in many civilizations. But, when interest-bearing lending grew more common, usury laws were enacted to control the practice.
Usury laws by state often differ; however, they normally limit the highest interest rate that may be imposed on loans. Some states have no usury regulations, while others permit higher interest rates on certain loans.
As of 2023, the highest allowable interest rate for a consumer loan in California is 10% per year. Certain states, however, such as Connecticut and New York, have significantly harsher usury regulations with much lower interest rate caps. Individuals and companies must be informed of their state’s usury regulations to avoid legal complications.
What Makes a Transaction Usurious?
A transaction is termed usurious if it includes lending money at an excessively high interest rate, often exceeding the legal limit specified by the applicable usury laws. On the other hand, what constitutes an unreasonably high interest rate varies based on the circumstances, the kind of loan, and the relevant legislation.
Following are some of the elements that might lead to a transaction being deemed usurious.
The interest rate levied on the loan may be regarded as usurious if it is much greater than the permissible maximum. For example, the transaction may be called usurious if a consumer loan’s legal maximum is 10% per year and the lender charges 25% per year.
Lenders may sometimes add hidden fees or levies to a loan, considerably raising the effective interest rate. The transaction may be deemed usurious if these fees are not disclosed appropriately.
Lenders may take advantage of vulnerable consumers by giving loans with excessive interest rates, knowing that the borrower would be unable to repay the debt. This is a kind of predatory loan and may be termed usurious.
The transaction may be deemed usurious if a lender breaches state usury regulations, regardless of the interest rate. For example, if a lender charges interest that exceeds the legal limit, it may be considered usurious, even though the rate is not unreasonably high.
What Are the Exceptions to Usury?
Depending on the jurisdiction and the kind of loan, there are certain exceptions to usury rules. Among the most commonly-encountered exceptions are:
- Credit cards: Since they generally take on greater amounts of risk and do not demand collateral for the loan, credit card companies are often able to charge higher interest rates than other lenders.
- Small loans: Small loan exceptions exist in several states, enabling lenders to charge somewhat higher interest rates on loans under a specific amount.
- Commercial loans: Since commercial loans are frequently more sophisticated and entail greater degrees of risk, usury rules may not apply to them.
- Government loans: Loans made by the government or its agencies are often free from usury rules.
What is the Penalty for Violation of the Usury Law?
The penalty for breaching usury laws differs by jurisdiction, but fines, penalties, and even imprisonment may be imposed. In rare situations, the loan itself may be declared null and invalid.
Predatory lending is the practice of lending money on unjust or exploitative conditions, often to vulnerable or inexperienced borrowers. In predatory lending circumstances, usury laws may apply, especially if the lender charges an unreasonably high interest rate or utilizes misleading or fraudulent techniques to make the loan.
Other regulations, such as consumer protection or fair lending legislation, may apply to predatory lending instances in addition to usury statutes. Penalties for breaking these regulations may be substantial, including monetary fines, restitution to the aggrieved borrower, and, in certain situations, criminal prosecution.
What Is the Highest Legal Interest Rate by State in Absence of Written Agreement?
Without a written agreement, the highest permissible interest rate varies by state, and some jurisdictions do not have legislation that lays down interest rate restrictions.
The following states have some of the highest legal interest rates in the absence of a formal agreement:
- 8% in Alabama
- 10% in Arizona
- 10% in Florida
- 9% in Illinois
- 16% in New York
- 6% in Texas
These rates may not apply to all kinds of loans or to all borrowers, and other variables may influence a loan’s interest rate.
Is There Any Federal Regulation of Usury?
The federal government has certain usury rules, notably for certain kinds of loans. The following are some instances of federal usury laws:
- Truth in Lending Act (TILA): TILA compels lenders to publish a loan’s annual percentage rate (APR), including the interest rate and additional fees and charges. Before the loan is provided, the APR must be communicated to the borrower.
- Military Lending Act (MLA): The MLA governs loans made to military personnel and their families. The MLA forbids lenders from charging interest rates of more than 36% on certain kinds of loans.
- Dodd-Frank Act to Regulate Wall Street and Safeguard Consumers: The Consumer Financial Protection Bureau (CFPB) was established by the Dodd-Frank Act, and it has the jurisdiction to oversee certain kinds of lending practices and enforce federal consumer protection laws.
Although some federal laws govern usury, most usury regulations are developed at the state level. Before engaging in a loan agreement, it is critical to know your state’s usury rules.
What Are the Remedies for Usury?
If a lender charges an interest rate that is more than the legal maximum, the borrower may have legal recourse. Some typical usury cures include:
- Refuse to pay: The borrower may refuse to pay the extra interest and may be entitled to recoup any previously paid excess interest.
- Withdraw the loan agreement: The borrower may be able to withdraw the loan agreement, which means the loan is canceled, and the borrower is no longer required to repay the debt.
- Statutory penalties: Statutory penalties for usury offenses vary by state and might include fines, damages, and other monetary penalties.
- Criminal penalties: In certain circumstances, usury may be deemed a crime, and lenders who participate in usury may face criminal charges.
- Liens on Real Property: Depending on the jurisdiction and the facts of the case, liens on real property may be subject to usury laws. A usurious lien may be found unlawful and unenforceable in certain situations, resulting in the lender losing their security interest in the property.
The rules regulating liens on real property may be complicated, and the particular remedies available to a borrower will be determined by the terms of the loan arrangement and the laws of the jurisdiction where the property is situated. Borrowers worried about a possible usurious lien on their real estate should get advice from an experienced attorney regarding their case.
Should I Contact an Attorney for Usury?
Whether you are dealing with usury or any credit-related problem, you must get the advice of a knowledgeable credit lawyer. A credit lawyer can help you manage the complicated world of credit rules and regulations and safeguard your rights and interests.
A credit lawyer can help you understand your choices and build a plan to get the best possible result whether you are dealing with a usurious loan, facing debt collection procedures, or have other credit-related legal problems. You may discover a credit lawyer in your region by searching online, asking friends and family for suggestions, or contacting your local bar organization.
Don’t put off getting the legal assistance you need; contact a credit lawyer soon to safeguard your rights and interests.