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Usury Laws: Definition, Purpose Regulation and Enforcement
By Will Kenton
Updated July 18, 2022
Review by Thomas Brock
Facts checked by Hans Daniel Jasperson
How Are Usury Laws?

Usury laws govern the amount of interest that can be charged on an loan. These laws target specifically those who charge too high interest rates on loans by setting caps on the maximum amount of interest that can be charged. These laws are designed to safeguard the consumer.

The United States, individual states are accountable for establishing their individual usury laws.1 While this kind of financial transaction could fall under the Constitution's commerce clause, Congress has not traditionally been concerned with usury. The government does consider the collection of usury through violent means as a federal offense.2
Important Takeaways

Usury laws set the amount of the interest rate can be charged for many types of loans, such as credit cards, personal loans and payday loans.
The laws governing the securities market are mostly enforced and enforced by the states, and not at a federal level.
Because the usury laws are enacted by the states, laws vary depending on the location you reside which means that interest rates may be drastically different from one state to the next.
Some banks charge the maximum rate permitted in the state in which they are located, as opposed to the state in which you reside. This is a procedure that was made lawful in 1978 following a U.S. Supreme Court ruling.

What Usury Laws Are Circumvented

Credit card companies typically benefit from being in a position to charge charges for interest that have been permitted by the state where the company was incorporated rather than follow the laws governing usury in the states where borrowers reside. Nationally chartered banks can also utilize the highest interest rate allowed by the state in which the institution was established. When they incorporate in states such as Delaware or South Dakota, such lenders have historically benefited from more flexibility granted by these states' more relaxed laws on usury.

Delaware, in particular, is frequently chosen for incorporation for a number of financial institutions because of the freedom allowed regarding the charging for interest rate. Around half of the credit activity in the U.S. market is conducted by firms that are have been incorporated in Delaware although they could keep their operations in other states.
Special Considerations

There's some controversy over the effectiveness of usury laws after decisions by the U.S. Supreme Court and legislation that gave financial institutions the power to circumvent the limits. The high court's rulings on the matter of Marquette National Bank v. First of Omaha Corp. allowed credit firms to charge customers out of state at the same interest rates they were able to charge in states where they were incorporated.3

Delaware's adoption of the Financial Center Development Act, which was largely a way to eliminate limits on fees and interest that can be charged to consumers who lend which further increased the demand of financial institutions to establish a branch there.4 Banks simply had to create subsidiaries or satisfy certain conditions for incorporation within Delaware to be eligible for the law and avoid the laws governing usury in other states. In response to this move certain states have changed their usury laws to allow local financial institutions the ability to charge interest rates on a similar basis to lenders from outside the state.
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