The state’s usury law limits loan rates, but most lenders are tax-exempt.



Ray Walker scratches his head over the credit card bill.

“I have noticed,” she told me, “that the interest charged exceeds what appears to be acceptable under the California Usury Act,” which limits the allowable interest rate on consumer loans to 10%.

Why, a resident of Woodland Hills wonders, her card is charged a rate of 23%.

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

In theory, the answer is yes. And no, actually.

I am often asked about California’s usury laws. This is a particularly hot topic in the light of Thursday Senate Banking Committee Hearing on setting the maximum loan rate at 36%.

Not to mention, Americans are now borrowing more than ever before.

Consumer debt rose to $ 14.64 trillion in the first three months of the year – largely due to mortgages, car loans and the perennial $ 1.7 trillion problem of outstanding student loans.

Average interest rate on a credit card in California and by country is reports.

Yet Article 15 of the California Constitution states that no more than 10% per annum may be charged for “any loan or abandonment of any money, goods, or things in action, if the money, goods, or things in action are intended to be used primarily for personal, family or household purposes. … “

Action does not mean that your cat is chasing a laser pointer around the living room. This is a legal term for a debt owed to a creditor in a lawsuit.

Before we get into why California’s usury law isn’t worth the paper it’s printed on, here’s a useful context. The Merriam-Webster Dictionary defines “usury” as:

one: Loans of money at an interest rate for its use, especially money loans at inflated interest rates.

2: An unfair or exorbitant rate or amount of interest, particularly interest in excess of the legal rate charged to the borrower for the use of the money.

The problem is not new. As Exodus 22:25 reads: “If you lend money to one of my poor because of you, you will not be a usurer for him and you will not impose usury on him.”

Leviticus 25:36 makes the feelings of God even clearer: “Do not take usury from him.”

That is, according to the Bible, charging people high interest rates on loans is a sin.

However, this is a warning that many believers choose to ignore, especially those in the GOP who are vehemently opposed to any form of financial regulation. Bad for business, one might say.

What should shock Californians is a loophole in the state constitution, which states that the 10% usury law rate cap does not apply to “any bank established and operating under any laws of this state or the United States of America.”

In practice, according to the California attorney general’s office, this means that any loan from a bank, savings and loan institution, credit union, financial corporation, or even a moneylender is exempted from the usury law.

In other words, most companies licensed to lend money to consumers in California are not subject to state primary law that specifically deals with lending money to consumers in California.

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

It is actually difficult to determine which loans are obeys the usury law. Some (but not all) mortgage loans may be subject to complex legal provisions. Some (but not all) loans to purchase or improve property may be covered.

“Californians applied stringent consumer protections decades ago — in particular, the constitutional 10% usury limit,” said Graciela Aponte-Diaz, director of federal campaigns at the Center for Responsible Lending.

“As a result of deregulation in the 1980s and 90s, the cap no longer applies to regulated financial institutions,” she told me. “Since then, predatory lending has spread throughout the state.”

I asked the American Bankers Association. for a comment. The trade group introduced me to Alan Kaplinski, a lawyer who is credited with “Pioneer” arbitration clauses in consumer contracts that prevent people from suing banks and other businesses.

Unsurprisingly, Kaplinski told me that “Californians have sufficient guarantees” against usurious interest rates and that “there is no evidence that banks in California are inflating consumers.”

Wells Fargo customers may have what to say about it

Either way, federal banking heavyweights can ignore state usury laws thanks to National Bank Act 1863, which usually prevents states from telling large banks how to do their business.

And like a rotten cherry on melting ice cream, US Supreme Court ruled in 1978 that the bank can charge all customers, no matter where they are, at any rate permitted by the bank’s state of origin.

This prompted South Dakota to abandon the usury law and invite creditors to open a store there. The state currently has Citi, Wells Fargo and Capital One credit cards, among others.

Delaware wasted no time in breaking the usury law as well. The state currently operates Bank of America, Chase and Discover credit cards.

Stir in this mix of payday lenders and you can see why some Democratic lawmakers say it’s time to set a national rate cap. The annual interest rate on payday loans can exceed 400%.

According to a proposal discussed in a Senate Banking Committee hearing on Thursday, a 36% rate cap will be imposed on all consumers, which currently applies to loans provided to military personnel.

Critics of the move, including financial services trading groups, say the 36% cap on the national rate would be harmful to consumers.

Credit Union National Assn. joined other financial institutions in speaking to legislators that “many consumers currently relying on credit cards or personal loans will be forced to turn to other companies for short-term financial needs,” including “moneylenders, unregulated online lenders and the black market.”

Consumer advocates find such unsubstantiated claims laughable.

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

Linda June, senior policy advisor at Americans for Financial Reform, told me that “the 3-digit interest rate should not be allowed anywhere.”

“The national rate cap will protect all consumers in the United States from this type of abuse,” she said.

I think we can do better. States cannot be prevented from protecting their residents because of federal banking law dating back to the Civil War.

Congress should update the National Banking Act to allow states to enforce their own, tougher consumer protection measures. California lawmakers must close a loophole that gives most creditors a jail-exempt card under state usury law.

Moreover, Congress must overturn this pathetic Supreme Court ruling that created usury for creditors. It was a boon for banks, but it didn’t benefit consumers.

In short, Ray Walker, there is nothing illegal about this 23% interest rate on your credit card.

But our state constitution clearly provides otherwise.


Source link