Almost all states today restrict the maximum rate of interest that may be charged to a borrower by a creditor with the maximum rate often varying depending on the type of borrower involved, the amount borrowed and the purpose of the loan with wide-ranging differences among the states as to the maximum interest rate applicable to a variety of loans. The federal government has never imposed a general restriction on usury in the United States, leaving it up to the states to regulate the matter as they see fit. With the exception of loans to active duty military personnel and their dependents for whom a maximum interest rate of 36 percent is imposed by federal law, Congress has been more concerned with mandating transparency as to the cost of credit transactions than with regulating interest rates or fees as such. The Truth in Lending Act (TILA), for example, requires lenders to provide to consumers detailed information about the cost of credit that includes not only interest, points, and related charges but also service or carrying charges, any loan fee or finder’s fee, fees for investigation or credit reports, credit insurance fees, broker fees charged to the borrower, and insurance premiums included in the finance charge. Thus the emphasis is on providing credit to consumers with full disclosure rather than on protecting consumers from unfair or even unreasonable credit terms (with the noted exception of active duty personnel and their covered dependents.)
Nevertheless, federal law does impact state usury laws in ways that undermine or negate state efforts to protect their citizens against usurious contracts. Nationally chartered banks and lenders sponsored by Native American tribes, for example, are excluded from state regulation. This has allowed some lenders to completely skirt state usury laws and in many cases charge interest rates that are higher than those imposed by illegal loan sharks. And many of these sub-prime lenders target the most desperate and least informed consumers, saddling them by design with loans that they can never repay. Among these lenders, payday loan lenders have attracted the most scrutiny, though at present there is little that states can do to protect citizens within their borders from such lenders who are eitehr federally chartered or aligned with Native American tribes.
For a full discussion of this issue, you can access the full text of my recently published article by clicking on teh following link: López, V. D. When Lenders can Legally Provide Loans with Effective Interest Rates Above 1,000 Percent, Is it Time for Congress to Consider a Federal Interest Cap on Consumer Loans? Notre Dame Journal of Legislation (Vol. 42, Issue 1) 2016.
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