Time for a national usury law?

First Premier Bank has just introduced its new 79% interest rate sub-prime credit card. No, that’s not a typo, and some experts expect to see more credit cards with sky-high interest.

Which makes me again bring up the topic of a national usury cap. Thomas Geoghegan recommended such a cap last year, in his article in The American Prospect. He suggested a credit card interest cap of 12% and a law completely barring payday loans.img_1180

I have filed several class action suits against large payday lenders (here’s a post on one of those suits). These lenders often argue that people need these 400% interest loans for short term emergencies. At what cost, though? In my experience, these lenders are commonly stretching out these “short term” loans for many months. People who borrow $500 will pay $2000 in interest over the year and they will STILL OWE THE $500.

Many states allow payday lenders to charge in excess of 1000% interest. These loans suck the very life out of working class folks. They amount to financial crack cocaine, because people often end up taking out a second, and a third payday loan in order to pay off the first one. It’s a terrible mess and it’s ruining lives.  That’s why 13 states have passed laws making sure that payday lenders cannot operate in those jurisdictions.   It’s time for the other states, and Congress, to get with the program.

To put this all in perspective, remember the stories about “loan sharks?”  Those were the good old days.  “Simple nominal annual interest rates on extortionate mafia loan shark debts averaged 250%.”  Syndicate Loan-Shark Activities and New York’s Usury Statute, 66 Colum. L. Rev. 167, 167 (1966).

And here’s another irony.  The Bible clearly holds that usury is a sin comparable to murder.   Usury is prohibited by Exodus 22:25:  “If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.”  Usury is also prohibited by Leviticus 25:35-37. In spite of these Bible quotes, if you want to find lots of payday stores and payday lenders, look for geographical areas where you’ll also find img_1182conservative Christians.   That is the finding of Steven M. Graves and Christopher Peterson, in a law review article entitled “Usury Law and the Christian Right: Faith-Based Political Power and the Geography of American Payday Loan Regulation,”   57 Cath. U. L. Rev. 637, 640 (2008):

We conclude, with a high degree of statistical certainty, that states with powerful conservative Christian populations tend to host relatively greater numbers of payday loan locations per capita as well as a greater commercial density of payday lenders. These findings propound a tragic and sad irony. Those states that have most ardently held to their pious Christian traditions have tended to become more infested with the progeny of money changers once expelled by Christ from the Hebrew temple. Legislators in those states, who have effectively used biblical principles to shape their legislative agenda on social and cultural issues, have failed to consistently apply biblical principles to economic legislation.

All it would take for Congress to outlaw payday loans is to write up a bill, have a majority of members of Congress approve of it, and then refer it to the President to sign it.  But that can’t happen these days because the financial services industry pays our politicians huge amounts of money so that they WON’T sign these sorts of bills.  And, of course, with regard to Congress, the banks “frankly own the place.”

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Erich Vieth

Erich Vieth is an attorney focusing on civil rights (including First Amendment), consumer law litigation and appellate practice. At this website often writes about censorship, corporate news media corruption and cognitive science. He is also a working musician, artist and a writer, having founded Dangerous Intersection in 2006. Erich lives in St. Louis, Missouri with his two daughters.

This Post Has 4 Comments

  1. Avatar of Erich Vieth
    Erich Vieth December 18, 2009 Reply

    BTW, Payday lenders now have more storefronts in the United States than McDonald's and Starbucks

    combined.

    This statistics is from an article by Paige Marta Skiba and Jeremy Tobacman entitled "Do Payday Loans Cause Bankruptcy?" (This answer is that signing up for a $300 payday loan increases the two-year Chapter 13 bankruptcy filing rate by 2.48 percent. This is rather amazing that a $300 loan could affect bankruptcies at all, but these payday loan customers are already financially stressed, and it is terribly difficult for them to get out of the payday loan cycle, where the principal is tiny compared to the interest rate makes us think of loan shark loans as the good old days.

  2. Avatar of Erich Vieth
    Erich Vieth December 18, 2009 Reply

    Perhaps you're wondering why there are no meaningful usury laws pertaining to any banks operating in the United States. After all, there used to be enforceable usury laws in most states, and these laws severely capped the interest a bank could charge. But those laws, even though they are still on the books, are no longer enforceable. Law professor Chris Peterson succinctly explains this modern absence of usury restrictions in his comprehensive 2008 law review article.

    The third, and still current, period in American usury law began in 1978 with the Supreme Court's decision in Marquette National Bank v. First of Omaha Service Corp. In this landmark case, the Court confronted for the first time the question of which state usury law applies when a national bank lends money to a consumer across state lines: should the law of the bank's home state or the law of the consumer's home state apply? In a historically dubious interpretation of the Civil War-era National Bank Act of 1864, the Supreme Court concluded that the law of the bank's home state applies. This seemingly innocuous holding was like a gunshot starting a frenzied race-to-the-bottom in American usury law. Recognizing the opportunity* to attract lucrative financial services jobs to their moribund economies, South Dakota and Delaware eliminated their ancient usury laws, allowing national banks headquartered there to “export” the nonexistence of an interest-rate cap to consumers in other states.

    State-chartered banks were aghast at their national bank competitors' newfound power and immediately began lobbying Congress for equal treatment. Two years later Congress complied. But instead of explicitly preempting usury limits, Congress finessed the issue by granting state banks whatever power that was already held by national banks. State legislatures, who were now powerless to constrain the interest rates charged by any bank headquartered in South Dakota or Delaware, capitulated. Seeing no point in punishing local businesses, every other state in the union passed “parity laws” granting their own local banks the right to charge whatever interest rate South Dakota and Delaware banks could import into their jurisdictions via federal law. The end result was what James White called a trompe l'oleil–a grand illusion. Every state in the union, save two, had relatively aggressive usury law on the books. And yet, even though no legislature had ever passed a law saying as much, the newly synthesized usury rule became: any bank can charge any interest rate it wants anywhere it wants.

    USURY LAW, PAYDAY LOANS, AND STATUTORY SLEIGHT OF HAND: SALIENCE DISTORTION IN AMERICAN CREDIT PRICING LIMITS, April, 2008 (92 Minn. L. Rev. 1110, 1121 -1122 (2008).

    Peterson argues that state legislatures engaged in misleading practices, using "small, innocuous numbers in usury laws in an attempt to minimize the public and media outcry over their decisions to legalize triple-digit interest rate loans."

    He advocates a 36% annual percentage rate price limit–the 1965 national median–as a new usury limit, and further advocates that this limit whoudl apply to all lenders, "irrespective of their mission, charter, or ownership."

  3. Avatar of Jay Fraz
    Jay Fraz December 22, 2009 Reply

    Barring usury would be one of the best forms of legislation that could ever be passed. Their contribution to society is minimal, their cost is high in the forms of bankruptcy and broken lives.

    Of course if the lending companies had it their way, indentured servitude would be reintroduced.

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