Overview of Usury

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Usury Overview

Usury is the act of charging of an excessive interest rate on a loan. Each state has its own usury laws that determine the maximum rate of interest allowed on a loan.  Usury laws are complicated and have many exceptions. If you are making a loan or defending against allegations of usury, you should consult with an experienced attorney.

For state by state summaries of usury laws, see the following links:

What Makes a Transaction Usurious?

In general, for a transaction to be usurious:

  • The transaction generally must be a loan.
  • The interest must exceed a statutory maximum, usually between five and 20%, depending on the state.
  • The loan and interest must be absolutely repayable by the borrower.
  • The lender generally must willfully intend to enter into a usurious transaction – they don’t need to know the rate is usurious, but they need to have intended to collect the usurious amount.

Which institutions are generally exempt from usury?

  • Financial Institutions and Insurance Companies
  • Federal and state banks
  • Federal and state savings and loan associations
  • Federal and state credit unions
  • Issuers of credit cards, such as Visa, MasterCard and American Express
  • Insurance companies

Licensed Lenders

  • Real estate brokers, when they make or arrange loans that are secured in whole or in part by real property
  • Commercial finance lenders
  • Consumer finance lenders
  • Residential mortgage lenders
  • Pawnbrokers
  • Industrial Loan Companies

Other Exceptions to Usury?

There are many exceptions to usury. Some of these exceptions are:

  • In many states, all commercial loans of a certain size and type are exempt
  • Bona fide purchases of receivables, since these are not technically a loan
  • Bona fide credit sales where the buyer agrees to pay the amount due at a later date.
  • Late charges.
  • Transactions where the seller finances the purchase of property and charges a premium for providing the financing.

It is also important to note that for a transaction to be usurious, the lender must have an absolute right of repayment. If the lender risks losing all or part of the amount given, he or she may transact for a higher rate of return than usury laws permit.

Examples: New York and California

New York

In New York State, the usury limits are defined for individuals and for corporations. A lender may not charge an individual borrowing under $250,000 an interest rate greater than 16% (GOB 5-501(1). If the loan is above this amount and less than $2,500,000 the maximum rate is 25%. If the sum exceeds $2,500,000 there is no limitation. In the case of a corporation, the limitation is 25% for all borrowed sums up to $2,500,000. Loans above this amount are exempt from the state’s usury law (GOB Section 5-5-1(6) (b).

In New York, civil usury applies to individual loans under $250,000 and permits the borrower to bring a civil suit against the borrower to recover the amount paid above the legal rate. If the lender is a business entity, the legal limit is 25% and applies only to loans below $2,500,000 (GOB 5-5-1(6)(a).

However, loans identified as usury which exceed 25% are deemed to be criminal usury – which is a felony.

California

Pursuant to California law, non-exempt lenders (the average individual) can charge a maximum of: (i) 10% interest per year (.8333% per month) for money, goods or things used primarily for personal, family or household purposes and (ii) for other types of loans (home improvement, home purchase, business purposes, etc.), the greater of 10% interest per year, or 5% plus the Federal Reserve Bank of San Francisco’s discount rate on the 25th day of the month preceding the earlier of the date the loan is contracted for, or executed. In other words, the general rule is that a non-exempt lender cannot charge more than 10% per year (.8333% per month), unless there is an applicable exemption.

Most licensed lending institutions engaged in the business of making consumer and/or commercial loans such as banks, savings and loan, credit unions, finance companies, and even pawn brokers are exempt from California’s usury laws. Also largely exempt are credit cards, pawnbrokers, and commercial loans in excess of $300k, subject to some qualifications.

What about credit cards?

There’s no federal ceiling on credit card rates, but card companies must follow the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (Credit CARD Act).

Federal court decisions and statutes have largely exempted credit card companies by allowing them to charge customers the interest rates allowed by the state in which the credit card lender is incorporated.  This is why most card companies are in South Dakota, Delaware or Nevada (no rate caps).

The primary exception being the 18 percent interest limit for federally chartered credit unions.

Usury laws have been weakened over time, as in Marquette supreme court case (nationally chartered banks can charge the highest rate allowed by their state of incorporation), DIDMCA (federally insured banks can charge out of state customers highest rate in the lender’s home state)

What Are the Remedies for Usury?

Generally, a victim of usury may sue to recover the total interest paid. In many states, the borrower may also bring a claim to recover treble—or a multiple—of the amount of interest paid. The treble amount recoverable is based on total interest paid, not only the total interest paid over and above the legal limit.

A lender may not recover interest on a usurious loan. However, after the deadline to repay the principal has passed, the lender is entitled to a return of the principal. If the debtor fails to repay the principal by the deadline, the lender may recover interest on the principal from the date the principal became due, until judgment, at the legal rate.

Overview of Usury

Usury Overview

Usury is the act of charging of an excessive interest rate on a loan. Each state has its own usury laws that determine the maximum rate of interest allowed on a loan.  Usury laws are complicated and have many exceptions. If you are making a loan or defending against allegations of usury, you should consult with an experienced attorney.

For state by state summaries of usury laws, see the following links:

What Makes a Transaction Usurious?

In general, for a transaction to be usurious:

  • The transaction generally must be a loan.
  • The interest must exceed a statutory maximum, usually between five and 20%, depending on the state.
  • The loan and interest must be absolutely repayable by the borrower.
  • The lender generally must willfully intend to enter into a usurious transaction – they don’t need to know the rate is usurious, but they need to have intended to collect the usurious amount.

Which institutions are generally exempt from usury?

  • Financial Institutions and Insurance Companies
  • Federal and state banks
  • Federal and state savings and loan associations
  • Federal and state credit unions
  • Issuers of credit cards, such as Visa, MasterCard and American Express
  • Insurance companies

Licensed Lenders

  • Real estate brokers, when they make or arrange loans that are secured in whole or in part by real property
  • Commercial finance lenders
  • Consumer finance lenders
  • Residential mortgage lenders
  • Pawnbrokers
  • Industrial Loan Companies

Other Exceptions to Usury?

There are many exceptions to usury. Some of these exceptions are:

  • In many states, all commercial loans of a certain size and type are exempt
  • Bona fide purchases of receivables, since these are not technically a loan
  • Bona fide credit sales where the buyer agrees to pay the amount due at a later date.
  • Late charges.
  • Transactions where the seller finances the purchase of property and charges a premium for providing the financing.

It is also important to note that for a transaction to be usurious, the lender must have an absolute right of repayment. If the lender risks losing all or part of the amount given, he or she may transact for a higher rate of return than usury laws permit.

Examples: New York and California

New York

In New York State, the usury limits are defined for individuals and for corporations. A lender may not charge an individual borrowing under $250,000 an interest rate greater than 16% (GOB 5-501(1). If the loan is above this amount and less than $2,500,000 the maximum rate is 25%. If the sum exceeds $2,500,000 there is no limitation. In the case of a corporation, the limitation is 25% for all borrowed sums up to $2,500,000. Loans above this amount are exempt from the state’s usury law (GOB Section 5-5-1(6) (b).

In New York, civil usury applies to individual loans under $250,000 and permits the borrower to bring a civil suit against the borrower to recover the amount paid above the legal rate. If the lender is a business entity, the legal limit is 25% and applies only to loans below $2,500,000 (GOB 5-5-1(6)(a).

However, loans identified as usury which exceed 25% are deemed to be criminal usury – which is a felony.

California

Pursuant to California law, non-exempt lenders (the average individual) can charge a maximum of: (i) 10% interest per year (.8333% per month) for money, goods or things used primarily for personal, family or household purposes and (ii) for other types of loans (home improvement, home purchase, business purposes, etc.), the greater of 10% interest per year, or 5% plus the Federal Reserve Bank of San Francisco’s discount rate on the 25th day of the month preceding the earlier of the date the loan is contracted for, or executed. In other words, the general rule is that a non-exempt lender cannot charge more than 10% per year (.8333% per month), unless there is an applicable exemption.

Most licensed lending institutions engaged in the business of making consumer and/or commercial loans such as banks, savings and loan, credit unions, finance companies, and even pawn brokers are exempt from California’s usury laws. Also largely exempt are credit cards, pawnbrokers, and commercial loans in excess of $300k, subject to some qualifications.

What about credit cards?

There’s no federal ceiling on credit card rates, but card companies must follow the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (Credit CARD Act).

Federal court decisions and statutes have largely exempted credit card companies by allowing them to charge customers the interest rates allowed by the state in which the credit card lender is incorporated.  This is why most card companies are in South Dakota, Delaware or Nevada (no rate caps).

The primary exception being the 18 percent interest limit for federally chartered credit unions.

Usury laws have been weakened over time, as in Marquette supreme court case (nationally chartered banks can charge the highest rate allowed by their state of incorporation), DIDMCA (federally insured banks can charge out of state customers highest rate in the lender’s home state)

What Are the Remedies for Usury?

Generally, a victim of usury may sue to recover the total interest paid. In many states, the borrower may also bring a claim to recover treble—or a multiple—of the amount of interest paid. The treble amount recoverable is based on total interest paid, not only the total interest paid over and above the legal limit.

A lender may not recover interest on a usurious loan. However, after the deadline to repay the principal has passed, the lender is entitled to a return of the principal. If the debtor fails to repay the principal by the deadline, the lender may recover interest on the principal from the date the principal became due, until judgment, at the legal rate.

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