A high-ranking U.S. Senator has filed a bill to revive an ancient but dormant practice by creating a national usury law that would cap consumer credit rates at 36 percent.
Sen. Richard A. Durbin, a second-term Democrat from Illinois, filed the “Protecting Consumers from Unreasonable Credit Rates Act of 2008” (S. 3287) late on Thursday. It would amend the Truth in Lending Act to impose a national cap on consumer credit interest rates.
- Establishes a maximum interest rate of 36 percent on all consumer credit transactions, taking into account all interest, fees, defaults, and other finance charges.
- Makes clear that this cap does not preempt any stricter state laws.
- Applies civil penalties for violations, including nullification of excess charges, fines and prison. Each violation would be subject to one year in prison and fine of at least $50,000.
- Empowers attorneys general to take action for up to three years after a violation.
If passed, the law would devastate the $50-billion a year payday loan industry. Payday loans are short-term cash advances available in 35 states. Because the payments are due quickly, when calculated at an annualized rate, the APRs can be astronomical.
“Within blocks of my home in Springfield, Illinois, there are payday lenders charging interest rates of 200 and 300 percent of the value of the loan,” Durbin said in a prepared statement. “These excessive rates are often hidden and can have crippling effects on those individuals who can afford it least. Congress must enact protections against predatory lending. America’s working families depend on it.”
An e-mail seeking comment from the Fiscal Service Centers of America — a national trade association for payday lenders — was not immediately returned.
Durbin’s move is the latest in a series of proposals to rein in perceived excesses by the consumer credit industry. Between born-again federal regulators and a Democratic-controlled Congress eager to flex legislative muscle, measures such as Durbins have put the lending industry under the broadest scrutiny in a decade.
By establishing a national usury rate, and specifically allowing states create lower rates, Durbin’s bill would effectively revive a dormant practice. Usury comes from the Latin word for “interest” and is a concept that goes back to ancient times. Usury laws have been part of Western culture throughout history, and became part of American state laws as well.
Individual states’ usury laws are still on the books, but effectively had been rendered moot by a 1978 Supreme Court decision. That decision let states “export” the law from the state where a credit card issuer is headquartered to apply to the rest of the country. As a result, credit card issuers placed their headquarters in states such as Delaware and South Dakota, which have no usury laws or very lax ones.
As of Tuesday afternoon, a full copy of the bill had not been filed in the Library of Congress (you’ll find it here when it is). A member of Durbin’s staff e-mailed us a copy.
See related: Feds back rules to curb “deceptive” credit card practices, House introduces Credit Cardholders Bill of Rights