Usury Laws

What are usury laws?

Usury laws limit the interest lenders may charge on loans to protect borrowers from excessively high or abusive rates. In the United States, these limits are set and enforced primarily at the state level. Federal involvement has been limited, though federal statutes and court rulings have shaped how state limits apply in practice.

Key takeaways

• Usury laws cap interest rates charged on loans to prevent predatory lending.
• States set and enforce usury limits; rate ceilings vary widely by state.
• Court rulings and federal rules allow some lenders (notably nationally chartered banks and credit card issuers) to use the interest rules of their state of incorporation, which can circumvent stricter rules in borrowers’ home states.

How usury rules operate today

• State control: Each state determines its own interest-rate limits and enforcement mechanisms. Some states impose strict caps; others are permissive or have no explicit limits.
• National banks and credit card issuers: These institutions often apply the interest rate permitted by the state where they are chartered or incorporated, rather than the borrower’s state law. This practice encourages lenders to incorporate in states with permissive laws.
• “Forum shopping”: Financial firms often incorporate in states that allow higher rates or fewer restrictions, enabling them to charge higher interest nationwide within those legal bounds.

State examples

• Delaware and South Dakota: Popular states of incorporation for financial firms because they allow more freedom in setting interest and fees.
• Nevada: Effectively no usury limits.
• Pennsylvania: Treats interest above 25% as criminal usury.
• New Jersey: General cap of 30% for individuals and 50% for corporations.

Predatory lending

Predatory lending involves imposing unfair, abusive, or deceptive loan terms on borrowers—typically very high interest rates, excessive fees, or onerous collateral requirements. Regulators such as the FDIC and the Consumer Financial Protection Bureau (CFPB) target abusive practices and pursue enforcement against firms that exploit consumers.

Historical and legal context

• Colonial origins: The first U.S. usury laws date to the 18th-century American colonies, many setting caps around 8%.
• Marquette decision (1978): In Marquette Nat. Bank v. First of Omaha, the U.S. Supreme Court allowed nationally chartered banks to charge interest consistent with the laws of the bank’s home state for out‑of‑state borrowers. That decision encouraged lenders to base operations in states with permissive interest rules.
• State-level legislative changes: Some states—most notably Delaware with its Financial Center Development Act—removed or loosened interest and fee limits to attract financial institutions.

Recent developments

• CFPB and enforcement: The Consumer Financial Protection Bureau, created under the Consumer Financial Protection Act of 2010, identifies and acts against abusive conduct in consumer finance. In 2023 the CFPB and the New York Attorney General sued an auto-lending firm (Credit Acceptance Corporation) for misrepresenting loan costs and steering consumers into high‑cost loans.
• Legislative responses: In 2023 several U.S. senators introduced the Empowering States’ Rights to Protect Consumers Act to restore states’ ability to limit consumer loan interest rates and help address high consumer debt burdens.

Bottom line

Usury laws are intended to protect consumers from excessive interest and predatory lending. Because states set these limits and federal court decisions have allowed national firms to rely on their state of incorporation, the practical effect of usury laws varies widely across jurisdictions. Regulators and lawmakers continue to debate and pursue reforms to better protect consumers from high‑cost credit.

Sources

Selected public sources on usury laws and enforcement include CFPB materials, court decisions such as Marquette Nat. Bank v. First of Omaha, FDIC guidance on predatory lending, and state usury statutes and analyses.