Usury Laws and Usury Caps

History

The term of usury actually means lending money at exceedingly huge interest rates and it comes from Latin, where it exactly stood for high interest.

Usury has got longer history than one can actually imagine. The notes about such unfair lending practices can be found in the New Testament, the Torah, and the Quran and they are referred as charging any interest on a loan; and all these resources strongly disapproved the idea. From the religious concept usury has become a more common term and nowadays it is the practice of charging excessive interest on loans. This is exactly what many payday lenders do at the moment.

In the U.S. great deal of attention is paid to this very subject. The first laws concerning usury in the USA appeared in 1965 and they have been updated and restricted since. At the present moment there is a number of states that has set usury cap on payday loans and lenders operating there has to comply with it.

US Laws

The discussion around payday loans and high interest rates has become much more heated than before. For the last several years more states have taken a more restrictive (and even prohibitive) approach in the attempt to bring a better order to the industry and introduce clear and straightforward regulations.

  • At the present moment interest rates on payday loans are capped at 36% and this regulation is supported by 14 states and the District of Columbia.
  • Besides, not a single new state has authorized high cost payday lenders since 2005.
  • State laws are supported by federal laws.



The main information on payday loans by state is represented in  Payday Lending 2016 State Statutes . Among other legislative alternatives took place over the past years are the following:

  • The federal Truth in Lending Act (TILA).
  • Military Lending Act (2006). A 36% APR cap on was introduced for payday loans offered to the military. It was backed up by the U.S. Department of Defense in 2015.
  • States act to stop payday loan abuses (2008). First North Carolina in and then Arkansas, Arizona, Washington DC, Montana, New Hampshire, Ohio and Oregon took steps to reduce triple-digit interest rates on payday loans.  Washington, Colorado, Virginia, and others have also taken steps to rule the industry for the benefit of borrowers.
  • End of bank payday loans (2014). As long as bank payday loans appeared to be not that different in terms of interest rates, their practices were eventually discontinued.



At the present moment more restrictive federal rules are expected. (Find more information from the Center for Responsible Lending) As a matter of fact, the Consumer Financial Protection Bureau (CFPB), drew a proposal for regulating payday and other small cash short-term loans in 2015. Brief summary of the proposal read:

 “The Bureau is conducting a rulemaking to address consumer harms from practices related to payday loans and other similar credit products, including failure to determine whether consumers have the ability to repay without default or reborrowing and certain payment collection practices. The proposal would cover two categories of loans. First, the proposal generally would cover loans with a term of 45 days or less. Second, the proposal generally would cover loans with a term greater than 45 days, provided that they: (1) have an all-in annual percentage rate greater than 36 percent; and (2) either are repaid directly from the consumer’s account or income or are secured by the consumer’s vehicle. For both categories of covered loans, the proposal would identify it as an abusive and unfair practice for a lender to make a covered loan without reasonably determining that the consumer has the ability to repay the loan. Among other things, the proposal would require that, before making a covered loan, a lender must reasonably determine that the consumer has the ability to repay the loan. The Bureau released a Notice of Proposed Rulemaking in June 2016, and is accepting comments on the proposal through October 7, 2016.”

In more words the basic points are:

  • A full-payment test: First, the proposal would cap the number of successive loans; second, lenders now would have to check the creditworthiness of a potential customer as well as their ability to support themselves without a need to reborrow in the course of the following  month.
  • Principal payoff option: $500 to customers  with no outstanding loans/the history of indebtedness  longer than 90 days (for a 12-month period). Up to 2 loan extensions are allowed as principal payoff option; however, 1/3 of the principal should be repaid with each extension.
  • Longer-term loan options: 2 longer-term loan options with more flexible terms. 1) loans with max interest rates 28% and max application fee $20. 2) loans that can be repaid in instalments  for the next 2 years with max APR 36%.
  • Debit attempt restriction: Written notice from a payday lender is required before they make an attempt to debit the consumer's account for payment collection. Max 2 unsuccessful attempts are allowed before access prohibition; authorization from the borrower will be further required.

Payday Lenders and Usury

In case of payday lending the law says that any company exceeding legal interest rates has no right to take any legal action against a borrower (to sue debt recovery, for instance) in case of late or default repayment on the basis of the unlawfulness in terms of principal charges.

Hight interest ratews are profitable for the lenders who operate in the sphere. Therefore, it is recommended to make sure the company is a legally operating one and abides by the federal and state laws; otherwise, payday lending can be fraught with trouble for a borrower.

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