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Senator proposes national usury rate; would cap max interest APR at 36%

Daniel Ray

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.

The bill:

  • 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

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  • Malcolm Larsen

    I am glad I live in South Africa where 200 – 300% rates are now illegal.

  • Stacy

    Sorry PayDay loans. I dont think this bill really helped at all. Credit card companies can still charge 39% and get away with it. Just change the law back to the 2% payment even if it is for 24 motnhs. The american people will be able to take a breath.

  • Jeff

    Wow, 36%, are you kidding me? The credit company lobbyists much have his number…

  • 36% is extortion,Durbin is nuts,tell him 36-100% is loan sharking!

  • Rebecca

    I think 36% is ridiculous, but at least that would cap the interest rate. Credit card companies need to have standard rules and regulations nationally, not determined state by state. The late fees are excessive. Now if you pay on the day your payment is due, but it is past 5PM, the payment is considered late and a $39 late fee is charged. It is criminal and might as well be loan sharking. This is one of the major financial crisis’ in this country! Unreasonable interest rates and fees!

  • Jill Southers

    I think it is time for the federal government to step in and provide debtors some relief. Citizens of the United States are living in debt for their entire lives, never being able to pay back their debts, due to rising costs they incur from creditors charging even more interest and late fees. In addition, paying on debts is preventing our citizens from purchasing goods and services, and hurting the American economy. A cap on interest rates, nation-wide, would actually create some competition for creditors, as a citizen could re-finance debts at a lower rate, from another creditor. Currently, some people are paying far more than 36%–especially on defaulted student loans, which are around 50% interest on the original debt. This is “fake money” that neither has assets, nor services, to back it, and has never exchanged hands nor exists to provide any capital to create new businesses. A cap on interest is a step in the right direction.

  • Doug

    36% is still usury. The Democrats must have deep roots into the credit card industry, because they are now jacking up their rates to these levels. They were making ludicrous profits at 18%. As usual, Mr. Durbin’s bill is useless.

  • Terri

    With the country in such a financial crisis I think we need to take a look at the picture as a whole. If people lose jobs and can’t pay, do credit card companies really think raising the rates to 36% will help the consumer? Not to mention the $39.00 late fee. A program that helps the consumer restructure the debt would be a win – win situation. Consumers with stop paying and then the credit card companies are going to ask the government to bail them out. Bad management, poor management and usury has got to stop.

  • Chip

    I own a consumer finance company and here is a different side to this issue…a $500 loan for 6 months produces an interest charge of $37.66. Factor in a 7%+ default rate and it becomes impossible to operate profitably at 36%…100 loans produce $3,766 in interest, seven loans charge off, resulting in a gross profit of $266 – no one can operate on a margin this thin. Consumers who use finance companies do not qualify for bank loans or credit cards at lower rates, and if they did qualify, banks would not make loans this small because they are not profitable. Rates are high on small loans to consumers with poor credit histories for a reason – the gross interest return has to be at such a level to support the default rate. Cap the return at 36% and companies that serve this segment of our population will exit the business, effectively cutting off the consumer with poor credit from being able to borrow money. The only solution then would be for the US government to make these loans or to insure these loans much like they do student loans through Sallie Mae. The default rate on student loans is astronomical – yes, the consumer has low rates, but many default, and the taxpayers pick up the tab. If you want to cap rates, do so on loans over $2,000 – below that the economics just do not work. Let me have a reasonable return and take the risk, not the gov’t. I’d much rather see free enterpirse at work than more government intervention that sounds good but actually harms businesses, employees, taxpayers, and ultimately consumers.

  • Becca

    Since when did America develop a conscience and who is to say anyone them to make a PERSONAL DECISION for the consumer. We are a free society existing supposedly in a free market. Yeah, right….. People can choose whether or not they want to take a loan out and at what rate. It’s the company’s perogative just how much risk they want to take and on who. This is just one way for the govt’ to insert themselves into your lives…. again. Recognize it for what it really is…. One more right bites the dust.

  • Becca, I would quibble with just one thing you said. People presently can’t choose the interest rate on their credit cards. It’s the only type of loan where you can’t be sure of the cost. Under current law, card issuers may, with just 15 days’ notice, change the rate they charge on previous balances to anything they please, for any reason they please.

  • John

    Let me ask you this….If I let you borrow $100 for 2 weeks because you had to buy a new tire for your car or else you wouldn’t be able to go to work and I asked you to pay me back $115 after 2 weeks, would keeping your job be worth $15 bucks…yes it would. The interest rate would be 391% on that loan. Capping the interest rate would mean I could only charge you $1.40 for that loan. It wouldn’t be worth me lending you the money, therefore you would not be getting to work, meaning you would loose your job. Annual Percentage Rates are based off, you guess it, Annually, yearly…not 2 weeks. Sure If I loaned you money for 2 years, a 36% cap would make sense. But not on a payday or short term loan. The banks are not going to lend money to these people who need help, therefore the people won’t get help. By the way for every 10 loans a loan company makes at least 10% of the borrowers don’t re-pay the loan…meaning if you made 10 $100 loans and charged $15 per loan you would expect to make $150 but if only 1 person did not repay the loan the company makes $35 for those 10 loans.

  • Sheldon

    Loan sharking is loan sharking, it is unfortunate this happens. Folks take advantage of people less fortunate, and don’t forget these loans are sold off and repackage as CDO’s, think of MBS’s with Housing crisis. You pay off a car loan faster than you do a credit debt. The credit card industries make billions of dollars on interest rate and fees. Look at the bank’s ATM, they charge you to withdraw your own funds. This is not a free market, your choices are limited, and they all conspire to stick it to the consumers. Even the Politician’s, look at Senator Biden state, Delaware, credit card capital of the world. We should start putting our money under our mattress, like our grandparents did in the old days.

  • Chris Schrader

    If people were responsible and paying things off and not defaulting to begin with; and not being overindulgent and sloppy with their credit….and taught correctly how to manage their credit to begin with, there would be no “credit crisis”….people know how to work bankruptcy to their advantage and frontload their bills and stick creditors with bill…where’s the outcry on that?

  • Mark

    What is the status of this Bill? When is it going to be voted on and what are the chances of it passing?

  • Joel

    People are free not to take out a loan. There is also an answer to the credit cards changing the intrest rate on your card….don’t carry a balance on the card.
    What happened to personnal responsitility in this country.

  • Tracy

    If this bill were to pass, it would completely destroy the pawn industry in this country in one fell swoop. I know this industry doesn’t have the best reputation, but many of the people who take out collateral-based loans simply don’t have the means to get loans in any other way. Especially in the current economic situation, pawn loans are an important option for people who don’t have a great financial history, or whose financial history is in another country. Not to mention the fact that destroying one of the few industries which is actually doing well right now would not be a good move for the country’s overall economic health. But running a pawn business is not cheap, and the process of evaluating and taking in collateral is too expensive to be possible if the APR cap passes. Between the lease of the space (which often has to be spacious enough to accommodate large collateral items such as tools, electronics, bicycles, etc), security measures, the payroll and training of the staff, and the risk that defaulted loans won’t sell, there’s simply no way to run a profitable business. It would be illegal under this new law to charge more than $3.00 of interest on a one-month loan for $100.00. Some pawn loans are as low as $10 or $15 … a pawn shop would be loaning at a loss if they could charge only $0.30 of interest.

  • Patsy A. Vaughn

    For way too many years, folks have been bombarded weekly, with mail from “Lending Institutions” encouraging them to open new and additional charge card accounts. This made “charging” extremely easy and tempting, helping this nation into it’s current financial disaster.
    IF we are to help this economy, Congress should pass laws restricting the amount of “interest” that can be levied on ALL existing accounts. Usery used to be 11%… That should be the maximum interest allowed today, especially with charge cards. The high balances that people owe are and will be, difficult to repay. Wopper interest rates, even as high as 35% will prevent folks from EVER paying these cards off in full; not even to getting them paid down to safely use again… a result the economy really needs.
    The high interest rates allowed by charge card companies has been immoral and greedy. Someone in Congress needs to offer a bill to limit these obscene rates to 11% or lower. This will help the country more to get back to manageable levels than most things offered today.

  • Jeremy

    Congress does not need to step into the private market and control anything. Has anyone seen the national deficit. What makes anyone think that the government can or will fix anything. The consumer should decide if there is a need for a particular industry and if they are willing to pay a particular rate. It’s called taking responsibility for your self. It’s what being free is all about. It will be a sad day when we see the government control every aspect of our lives. The government should provide security by protecting us from foreign and domestic threats and promote welfare. I believe I read that somewhere in the constitution. I don’t think there is anything in the constitution about stepping in the private sector and controlling things. Or do we make it up as we go now?



  • Jeanne

    I know first hand about payday loans and short term loans. If it wasn’t for the help of these loans, I would probably be living on the streets. I work hard, make good money, but besides paying all my credit cards on time each month, they are still raising rates (Chase is at 31.99%), lower my limits and canceling them all to together, I find I have a better rate through payday and short term loans. I didn’t lower my credit score, the credit card companies are doing that for me. So I choose to deal with loan sharks, which is basically what credit card companies are also, only they fly under the wire. For $2000 I pay $89.95 every payday for 24 months. I usually pay $140 or more to pay off the balance and save on interest. I have smaller loans with 3 companies, which I borrowed $700 and pay $100-$125 a month for 7-9 months. I generally pay $500-$750 month for these loans. I pay those, pay all my credit cards on time, but my score keeps sliding. I pay $10-$70 a month on each credit card and I have over 17 cards. I’m not saying I’m happy with it, but it is what it is. I chose to take out the loans. I tried BOA, who I banked with and they all but laugh. I am honest, not planning on skipping out on a loan, but I am still supposedly a bad risk. I can see the risk these companies take when they make a loan. Not every thinks that if they owe money, they have to repay it. I think they serve a purpose and if they are making money while providing that service, I don’t blame them. It’s like anything else….if you don’t want to pay the high interest rates, don’t take out a loan with them. People should be able to decide for themselves. I don’t like the fact that some people want laws in place to control what I choose to do with my money. At least you can see the interest rates before you sign the contract, unlike credit cards that change the terms from month to month.