State Usury Law caps lending rates, but most lenders are exempt

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Rae Walker scratches his head on his credit card bill.

“I have noticed,” she told me, “that the interest charged exceeds what seems appropriate for the California Usury Act,” which caps the allowable interest rate for consumer loans at $ 10. %.

Why, wonders the Woodland Hills resident, is she being charged 23% on her card.

“They’re breaking the law, aren’t they? “

The answer is yes, in theory. And no, actually.

I am often asked about the California Usury Law. This is a particularly topical subject in light of Thursday’s event. Hearing of the Senate Banking Committee on the establishment of a national ceiling rate of 36% for loans.

Not to mention that Americans are now borrowing more than ever.

Consumer debt climbed to $ 14.64 trillion in the first three months of the year – fueled in large part by mortgages, auto loans and the perennial problem of $ 1.7 trillion in outstanding student loans.

The average interest rate on credit cards in California and nationwide is 16.16%, according to CreditCards.com.

Still Article 15 of the California Constitution states that no more than 10% per annum of interest may be charged for “any loan or withholding of money, goods or objects in action, if the money, goods or objects in action are intended primarily for for personal, family or household purposes. “

“Things in action” does not refer to your cat chasing a laser pointer around the living room. It is a legal term for something owed to a creditor in a lawsuit.

Before we understand why the California Usury Law is not worth the paper it’s printed on, here’s some helpful background. The Merriam-Webster dictionary defines “wear” like:

1: The lending of money with interest charges for its use, in particular the lending of money at exorbitant interest rates.

2: An unreasonable or exorbitant rate or amount of interest, especially interest above the legal rate charged to a borrower for the use of the money.

It’s not a new problem. Like Exodus 22:25 declares: “If you lend money to one of my people who is poor by you, you will not be like a usurer to him, and you will not impose usury on him.

Leviticus 25:36 makes God’s feelings even clearer: “Take no wear and tear from him.

That is, according to the Bible, making people pay high interest on loans is a sin.

It’s a warning, however, that many people of faith choose to ignore, especially those in the Republican Party who vehemently oppose any form of financial regulation. Bad for business, you might say.

What should shock Californians is a loophole in the state constitution specifying that the usury law’s 10% cap rate does not apply to “any bank created and operating under and in accordance with the law. to the laws of that state or of the United States of America ”.

In practice, according to the California Attorney General’s Office, this means that any loan from a bank, credit union, credit union, finance company, or even a pawnbroker is exempt from the usury law.

That is, most businesses licensed to lend money to consumers in California are not covered by primary state law that specifically deals with lending money to consumers in California.

If it’s not a Catch-22, I don’t know what it is.

In fact, it is difficult to determine which loans are subject to the law on usury. Some (but not all) loans secured by real estate may fall under the complicated provisions of the law. Some (but not all) loans for the purchase or improvement of a property may be covered.

“Californians had strong consumer protections in place decades ago – in particular, a 10% constitutional usury cap,” said Graciela Aponte-Diaz, director of federal campaigns for the Center for Responsible Lending.

“Thanks to a deregulation process in the 1980s and 1990s, the cap no longer applies to regulated financial institutions,” she told me. “Since then, predatory loans have proliferated in the state. “

I asked the American Bankers Assn. for comment. The business group put me in touch with Alan Kaplinsky, a lawyer who is known to have “Pioneer” Arbitration clauses in consumer contracts that prevent people from suing banks and other businesses.

Unsurprisingly, Kaplinsky told me that “Californians have sufficient collateral” against usurious interest rates and that “there is no evidence that California banks are abusing consumers.”

Wells Fargo customers might have something to say about this.

In any case, the heavyweights of federally chartered banks can ignore state usury laws thanks to the National Bank Act of 1863, which typically prevents governments from telling big banks how to do business.

And like a rancid cherry on a fondant sundae, the Supreme Court of the United States ruled in 1978 that a bank can charge all customers, no matter where they are located, regardless of the rate allowed by the bank’s home state.

This prompted South Dakota to reject its own usury law and invite lenders to move there. The state is now home to the credit card operations of Citi, Wells Fargo and Capital One, among others.

Delaware wasted no time in also messing up its usury law. The state now hosts the credit card operations of Bank of America, Chase, and Discover.

Stir payday lenders into the mix, and you can see why some Democratic lawmakers are saying it’s time to cap national rates. Annual interest rates for payday loans can reach 400%.

Under the proposal discussed at the Senate Banking Committee hearing on Thursday, a 36% rate cap that currently applies to loans to members of the military would be put in place for all consumers.

Critics of such a move, including trade groups representing financial services, say a national cap of 36% would hurt consumers.

Assn. joined other financial organizations in tell lawmakers that “many consumers who currently rely on credit cards or personal loans would be forced to look elsewhere for short-term financing needs” including “loan sharks, unregulated online lenders and the black market”.

Consumer advocates find such claims laughable.

“Usury caps of around 36% are the most effective way to stop predatory low dollar lending,” said Aponte-Diaz of the Center for Responsible Lending. “And stricter limits are essential for larger loans. “

Linda Jun, senior policy adviser at Americans for Financial Reform, told me that “a triple-digit interest rate should not be allowed anywhere.”

“A national tariff cap will protect all consumers in the United States from this kind of abuse,” she said.

I think we can do even better. States should not be prevented from protecting their residents because of a federal banking law dating from the Civil War.

Congress should update the National Bank Act to allow states to implement their own stricter consumer protections. And California lawmakers should close the loophole that gives most lenders a jail release card without state usury law.

In addition, Congress should overturn this Supreme Court ruling that created usury havens for lenders. It was a boon to the banks but did not do consumers a favor.

In short, Rae Walker, this 23% interest rate on your credit card is not illegal.

But our state constitution clearly wanted things to be different.

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