Public Opinion and the Limits of State Law: The Case for a Federal Usury Cap
47 Pages Posted: 18 Oct 2014 Last revised: 24 Feb 2015
Date Written: 2014
This Article calls on Congress to set a federal interest rate cap of 36%, applicable to all loans. Part II of this Article briefly describes the history of usury laws in the United States and then describes the patchwork nature of modem usury law. Part III describes various types of consumer loans, including high-cost loans like payday and title loans. Part III then reviews evidence of public opinion regarding interest rate caps for consumer loans, showing that Americans of both political parties favor caps of 36% or less by a wide margin. Given the broad and deep public support for interest rate caps, the question is not whether but how to accomplish these caps.
Part IV, the heart of the Article, describes the many ways in which state regulation of high cost lending has been inefficient and ineffective. Part IV.A describes the various forms of legislation that have attempted but failed to lower interest rates and curb other abuses in high-cost lending. It describes in detail the many work-arounds used by lenders to avoid whatever state law is enacted. These work-arounds include changing loan products to get around narrow definitions in state statutes, morphing lenders into another type of entity to get around the state statutes, or moving to lending online through Indian tribe affiliation or offshore entities. Part IV.B describes the difficulties with trying to enforce state statutes through judicial means. It discusses the unconscionability doctrine and its resulting inconsistent case law, the delays caused by lender bankruptcy, the difficulties posed by recent Supreme Court law on the enforceability of anti-class action clauses and arbitration clauses in high-cost loan contracts, and finally, the mere cost of enforcement litigation as a whole.
Keywords: Usury Law, Consumer Loans, Interest Rate Caps, High-cost Lending
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