Usury – A Crime No More

I grew up on the east coast, not far from New York City. It was common knowledge that there were men on the street who loaned money at exorbitant interest rates to desperate individuals willing to pay them. These men were called “loan sharks” or “Shylocks”. The loans were illegal and the men involved were frequently associated with organized crime.

Loan Shark clearly indicated a predator but, I didn’t grasp the meaning of “Shylock” until I studied The Merchant of Venice in high school. “Shylock” now made sense to me. In addition, I took a class in business law and learned all about usury. States had enacted laws to protect it citizens from paying exorbitant interest rates on loans.

My question now is “What happened to the Usury Laws?” An unintended consequence of the recent federal law, the Credit Card Act of 2009, is that credit card companies are raising their rates to levels that exceed the usury limits of most states.

Having received a notice that my credit card was going to charge me 29.99% interest on outstanding balances and a 25.99% on new purchases, I eliminated the card and decided to research what was going on. Isn’t this Usury?

No, it isn’t usury. President Obama’s Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 may improve consumer disclosures and end some questionable practices of the credit card companies. But it does not cap interest rates.

I decided to do some research and learned the following. A 1978 Supreme Court decision permitted national banks to charge the highest interest rate permitted in it’s home state to all of it’s customers across the country. This led the banks to establish themselves in states with very liberal usury laws. Hence, the move to Delaware and South Dakota. In 1980, state-chartered banks were given the same power in charging interest rates. Thus, banks (ie credit cards) are exempt from usury laws. That consumer protection has vanished.

It wasn’t too long ago that it was common for credit card companies to woo consumers with balance transfer offers. “Transfer your high interest balances to our card and pay a lower rate until you pay it off” was everywhere. No longer, folks. Now you’re going to pay 29.99%.

Say goodbye to the usury laws and hello to the Law of Unintended Consequences.