Usury Laws

Usury laws are regulations that prohibit charging interest above a certain level on loans, often a specified ceiling. Usury laws were used in Biblical times as well as in ancient Greece and Rome as indicated in historical documents. These laws have long had [Page 763]great appeal through the ages and, until recently, applied to mortgage markets for residential loans in the United States. However, usury laws continue to be employed in other consumer markets.

Usury laws are intended to protect consumers of credit (borrowers) from unscrupulous or unethical sellers of credit (lenders) who attempt to charge very high rates of interest. Such actions are viewed as against public policy. Very high rates of interest are usually defined as effective interest rate charges above a certain level.

Mortgage markets are only one type of market for which usury laws have been passed. Consumer credit, automobile loans, and credit card revolving charge cars are also frequently subjected to usury laws in the United States. Often, these statutes are part of the consumer protection legislation that has become prominent in most states in recent decades. The latest round of consumer protection regulation in 2009 stems from the financial crisis and contains additional protections of borrowers in the area of usurious borrowing rates. Despite the recent federal legislation, it is important to note that usury laws are always state regulations, so there are differences in the legal environments on this issue between the various states.

Extensive research has been conducted on the economic effects of usury laws. Much of the research has provided empirical evidence about the operation of the usury laws in specific lending markets. Usury limits were in place for mortgage lending in many states until 1980, and there is a body of knowledge about the effects of usury ceilings for housing and mortgage finance as well.

Regarding mortgage markets, the weight of the evidence is overwhelmingly clear: Usury laws often failed to assist with low- and middle-income borrowers’ contracts with lenders and often had the perverse effect of reducing the supply of mortgage funds for low-income borrowers. Therefore, it is generally agreed at least in mortgage markets, that usury laws, if anything, tended to hurt the consumers they were intended to protect.

One experiment was to use a moving interest rate ceiling (i.e., prohibit mortgage interest rates above a specified limit and when interest rate levels changed, the lender would adjust the usury ceiling accordingly). The idea was to try to mitigate the adverse effects of restricting the supply of mortgage funds as reported in the empirical research but to continue to guard against gross violations of normal interest rate charges. However, the research failed to show that this experiment had any impact on economic behavior whenever the ceiling was above the market rate of interest.

After an abundance of evidence was accumulated during the 1960s and 1970s and with an important governmental study of the American financial system (called the Hunt Commission Report in 1972), federal legislation passed in 1980 prohibited the enforcement of any usury laws in mortgage markets for federally insured mortgages. These turn out to be the majority of mortgages made in the United States. Effectively, usury laws were made null and void for mortgages beginning in the 1980s. Consumer protection has now shifted to other aspects of the mortgage market and financial system.

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