Usury

Usury is the charging of interest at a rate higher than the applicable law permits. The word carries a moral history, but as a legal term it is arithmetic: a rate is usurious only by reference to a stated maximum, and the whole difficulty in the United States is working out which maximum applies.

The federal statutes use the word directly. 12 USC 86 is headed "Usurious interest; penalty for taking; limitations" and provides the consequence when a national bank charges more than 12 USC 85 allows. What neither section does, and what no federal statute does, is set a general ceiling for consumer credit. That job belongs to the states, which is why the answer to "is this rate legal" depends on where the lender is rather than on any national number.

The structure is the thing worth understanding, and it has three layers.

First: there is no general federal ceiling. Rate limits on consumer credit are set by state law, and they vary by state, by the type of lender, and often by the type and size of the loan. Published material on the Truth in Lending Act makes the complementary point from the other direction: that statute regulates the information a lender must give, not the price it may charge.

Second: federal law decides which state's ceiling reaches a bank. 12 USC 85 provides that a national banking association may "take, receive, reserve, and charge on any loan or discount made, or upon any notes, bills of exchange, or other evidences of debt, interest at the rate allowed by the laws of the State, Territory, or District where the bank is located, or at a rate of 1 per centum in excess of the discount rate on ninety-day commercial paper in effect at the Federal reserve bank in the Federal reserve district where the bank is located, whichever may be the greater, and no more." Where a state fixes no rate at all, the same section supplies a fallback of 7 percent or the Federal Reserve figure, whichever is greater.

Congress then wrote the same rule for a different set of banks. 12 USC 1831d, headed "State-chartered insured depository institutions and insured branches of foreign banks", opens by saying its purpose is "In order to prevent discrimination against State-chartered insured depository institutions", and gives such a bank the ability to charge, "notwithstanding any State constitution or statute which is hereby preempted for the purposes of this section", interest at the greater of the Federal Reserve figure or "the rate allowed by the laws of the State, territory, or district where the bank is located." Two statutes, two categories of bank, one rule.

That mechanism produces a familiar result: a credit card issued by a bank headquartered in a permissive state can carry a rate the cardholder's own state forbids its local lenders to charge. The live guide to credit and debt describes the effect and the 1978 decision behind it. How far the same reasoning reaches arrangements between a bank and a non-bank lender is actively contested, and this page does not resolve it.

Third: the remedy, where it applies, is unusually harsh. 12 USC 86 provides that taking or charging a rate greater than section 85 allows, "when knowingly done, shall be deemed a forfeiture of the entire interest which the note, bill, or other evidence of debt carries with it, or which has been agreed to be paid thereon." If the excess has actually been paid, the payer "may recover back, in an action in the nature of an action of debt, twice the amount of the interest thus paid", provided "such action is commenced within two years from the time the usurious transaction occurred." 12 USC 1831d(b) gives the parallel remedy against a state-chartered insured bank, with the same two-year limit running from the date of payment. Note what is forfeited: not the excess above the ceiling, but the entire interest the instrument carries.

The federal ceilings that exist are scoped to a class, not to lending generally. The Military Lending Act's implementing regulation provides at 32 CFR 232.4(b) that "A creditor may not impose an MAPR greater than 36 percent in connection with an extension of consumer credit" to a covered borrower, meaning an active-duty servicemember or a dependent. It is a genuine cap and it is enforceable, and it says nothing at all about what may be charged to anyone else. Published material on payday loans makes the same point about the same provision.

A second one is scoped to the lender instead. 12 USC 1757(5)(A)(vi) provides that for a federal credit union "the rate of interest may not exceed 15 per centum per annum on the unpaid balance inclusive of all finance charges", and then lets the National Credit Union Administration Board set a higher ceiling for periods of up to 18 months where it determines that market rates have risen and prevailing rate levels threaten the safety and soundness of credit unions. So the operative ceiling for a federal credit union is the statutory figure unless the Board has raised it, which is why the current number is published by NCUA rather than fixed in the statute. It binds that one category of lender and nobody else.

Two things usury is not. It is not the same as criminal lending: a licensed lender that overcharges has a civil problem, while enforcing a debt by threat is a federal crime under a different chapter entirely. And it is not the same as a rate being deceptive. A disclosed, accurate, lawful rate can still be ruinous, and an undisclosed rate can be well within a state's ceiling.

Establishing whether a rate is usurious runs in three steps. Identify the lender and what kind of institution it is, because that decides which body of law supplies the ceiling. Identify the applicable state, which for a bank is where the bank is located rather than where the borrower lives. Then compare the rate charged against that state's limit for that kind of credit, keeping in mind that a state may set several limits for several kinds of loan.

A hypothetical showing the size of the federal remedy. Suppose a national bank knowingly charges a borrower a rate above what the law of the state where the bank is located allows, and the borrower pays $4,800 of interest before noticing. Under 12 USC 86 two things follow. The entire interest the note carries is forfeited, so nothing further is owed on account of interest for the rest of the loan. And because the greater rate was actually paid, the borrower may sue to recover twice the amount paid: 2 times $4,800, or $9,600. The clock is the constraint. The action must be commenced within two years from the time the usurious transaction occurred, and a borrower who discovers the problem in year three has the forfeiture argument and not the recovery.

The same structure applies against a state-chartered insured bank under 12 USC 1831d(b), which sets its two-year clock from the date of payment. Both are federal remedies tied to those specific categories of lender. A dispute with a lender that is neither is a question of that state's own usury statute and its own remedies, which differ.

Pros of usury ceilings

• A ceiling is a bright line. Unlike a judgment about whether a loan was fair, it can be checked against a number.
• The federal remedy against a bank that exceeds the applicable ceiling is severe enough to matter: forfeiture of all interest, plus twice what was paid.
• Where a cap binds, it removes the highest-priced tier of lending from the market entirely rather than requiring the borrower to recognize and refuse it.
• The military cap is measured on a rate that includes fees and charges for ancillary products rather than on the interest rate alone, so it is harder to price around than a cap written on the interest rate would be.

Cons and limits

• There is no general federal ceiling, so the protection a borrower has depends on which state's law reaches their loan, and that is often not the state they live in.
• For a bank, the applicable ceiling follows the bank's location, which means a borrower's own state cap may not reach the credit they are actually offered.
• A cap set too low can withdraw credit from the borrowers it was written for rather than repricing it, and the effect is not visible in the rate anyone is quoted.
• The remedies at 12 USC 86 and 1831d(b) run against particular categories of bank and carry a two-year clock, so they are narrower and shorter-lived than they first appear.
• Usury says nothing about fees, terms, or how a loan is collected, so a lawful rate can sit on top of a structure that is the real problem.