Usury means charging an excessive interest rate on a loan. Every state has its own usury laws that determine the maximum rates of interest that are allowed on loans.
Under usury laws, a lender is not permitted to charge an outrageous interest rate. If an individual is charged an exorbitant or illegally high interest rate, they may be a victim of usury.
Usury laws are complex and have many exceptions. If an individual is making a loan or defending against allegations of usury, they should consult with an experienced financial attorney.
A usury example would occur if a creditor loaned an individual $10,000 and charged an interest rate of 18% a month. The state where the individual resides has a usury law that limits the interest rate to 9%.
In this example, the creditor is charging the individual usury and is in violation of state law.
The History of Usury
Usury currently refers to charging excessive interest. Originally, however, it referred to charging interests of any amount.
Some major religions have histories of disallowing the charging of interests. Islam and some traditions of Christianity did not permit the charging of interest and Judaism did not allow for the charging of interest between two Jewish people.
However, it did allow for charging of interest between a Jewish individual and a non-Jewish individual. In the past, as now, usurious lending practices have often been used to take advantage of the poor.
What Makes a Transaction Usurious?
Currently, in the United States, usury is regulated by individual states. In general, however, for a transaction to be usurious, the following must apply:
- The transaction must be a loan;
- The interest must exceed the statutory maximum, usually between five and 20%, depending on the state;
- The loan and the interest must be absolutely repayable by the debtor; and
- The lender must have willfully intended to enter into a usurious transaction.
A lender does not have to knowingly charge a higher interest rate than the law allows to violate usury laws. The lender only has to intend to take the amount of interest they actually receive.
A usurious lender is often referred to as a loan shark. Making usurious loans may be referred to as predatory lending.
A court will not permit these types of lenders to recover the funds they claim they are owed if they have charged excessive rates. The maximum loan rate in a certain state may depend on whether or not the loan was agreed to in writing.
Even if a written agreement was formed, the state will typically set a maximum interest rate. It may, however, be higher than the state’s general rate for unwritten agreements for loans.
There are some states that also require that a lender be licensed. The requirement may depend on:
- The nature of the loan;
- The amount of interests charged; and
- The amount of the loan.
It is important for an individual to check their local state laws prior to entering into a loan or giving out a loan.
How Are Banks Prevented from Charging Usurious Rates?
There are federal laws enacted to prevent national banks from charging usurious rates on loans. It is important to note that national banks are not governed by state laws that govern usury.
Examples of state maximum interest rates that apply in the state in the absence of a written agreement include:
- Alabama: 6%;
- Arkansas: 17%;
- California: 7%;
- Connecticut: 12%;
- Florida: Determined yearly;
- Georgia: 7%;
- Illinois: Determined by laws in effect at the time a contract is made;
- Louisiana: 12%;
- Maine: 6%;
- Maryland: 6%;
- Massachusetts: 6%;
- Michigan: 5%;
- Missouri: 9%;
- Montana: 6% above Federal Reserve’s prime rate;
- Nebraska: 6%;
- Nevada: prime rate of largest Nevada bank plus 2%;
- New Jersey: 6%;
- New York: 16%;
- North Dakota: 6%;
- Ohio: 8%;
- Pennsylvania: 6%;
- Tennessee: 10%;
- Texas: 6%;
- Utah: 10%;
- Vermont: 12%;
- Washington: 12%; and
- Wyoming: 7%.
What Are Permissible Rates of Interest National Banks Can Charge?
A national consumer bank has the option of three permissible rates of interest they are permitted to charge consumers, including:
- The rate of interest allowed by state laws or statutes where the bank is located;
- One percent above the discount rate on 90-day commercial paper in effect at the Federal Reserve Bank in the district where the bank is located; or
- If state law prevents banks from charging interest, national banks in the state may charge 7% interest.
How Do I Know If My Bank Is Committing Usury?
If an individual believes that their bank in charging a usurious interest rate on a loan, they must show that the bank:
- Loaned the money;
- Understood the money loaned would be repaid;
- Knew they were going to make a profit greater than permitted by law; and
- Had the intent to violate the law.
Banks may also violate usury laws by charging additional fees that constitute interest payments. If an individual believes they have been charged a usurious fee, lawyers that deal with bank issues can help.
Do I Have to Repay My Loan if the Bank Violated the Law?
Although an individual’s bank may be found to have violated usury laws, the individual still has the obligation to repay the amount of money that is loaned to them.
In general, a new contract will be drafted with a legal rate of interest that the individual and their bank agree upon. If an individual already paid usurious interest, they may recover from the bank twice the amount of interest that they paid.
Is There Any Federal Regulation of Usury?
Although there are currently no federal statutes enacted that govern usury between private parties, the United States Supreme Court has issued decisions that may make it possible for Congress to do so under the Interstate Commerce Clause in Article I of the U.S. Constitution.
What Are the Remedies for Usury?
If an individual is a victim of usury, they may sue to recover the total interest paid. In many states, the borrower may bring a claim to recover treble, or a multiple, of the amount of interest paid. The treble amount that is recoverable is based on the total interest paid, not just the total interest paid over and above the legal limit.
A lender is not permitted to sue to recover interest on a usurious loan. After the deadline has passed to repay the principal, however, the lender is entitled to a return of the principal.
If the borrower fails to repay the principal amount they owe by the deadline, the lender may be able to recover interest on the principal from the date the principal became due until the date of the judgment at the legal rate.
What Are the Exceptions to Usury?
There are numerous exceptions to usury, including:
- Bona fide credit sales where the buyer agrees to pay the amount due at a later date;
- Late charges;
- Transactions where a seller provides financing for the purchase of property and charges a premium for providing that financing;
- A loan made by a licensed pawnbroker within the scope of the license;
- Payday loans made by licensed payday lenders;
- Real estate loans arranged by licensed real estate brokers, secured by a lien on real property; or
- A loan that is made to carry out a joint venture between a lender and a borrower.
It is important to note that, for a transaction to be usurious, a lender must have an absolutely right to repayment. If the lender risks losing all or part of the amount given, they may transact for a higher rate of return than usury laws allow.
Do I Need a Lawyer?
As noted above, usury laws can be complex and vary by state. If you believe your bank is charging you against the laws, it is important to consult with a financial lawyer.
The time limit for bringing an action against a bank for usury is 2 years. Because of this, it is important to consult with an attorney as soon as possible.