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Usury
Practical Law Glossary Item 6-507-0080 (Approx. 3 pages)
Glossary
Usury
Lending money at an unreasonably high rate of interest. Usury is regulated and enforced primarily by state usury laws, including the rate of interest determined to be usurious. However, there are federal laws that may also apply, including the Racketeer Influenced and Corrupt Organizations Act (18 U.S.C. §§ 1961 to 1967). Violators can incur civil and criminal penalties.
In addition to charging high interest rates, lenders can violate certain states' usury laws by making loans too expensive through the use of unreasonable additional fees (for example, late payment fees).
Each state has common exceptions to their usury laws that may apply, such as:
- Certain commercial transactions. In New York, for example, loans made to corporations for business purposes in amounts of $100,000 or more that are secured under the Uniform Commercial Code are exempted from New York's criminal usury laws if on the date when the interest is charged or accrued, such interest is not greater than eight percentage points above the prime rate (N.Y. Gen. Oblig. Law § 5-526(1)).
- Transactions over a certain limit. Under the criminal usury statute, the maximum interest that can be charged is 25%. But this limit does not apply to loans in excess of $2.5 million (N.Y. Gen. Oblig. Law § 5-501(6)(b)).
The US Supreme Court decision in Marquette v. First Omaha National Bank and subsequent federal laws and regulations have allowed both state and national banks to circumvent many state usury laws by establishing their headquarters in states with more generous usury laws and exporting these more favorable rates to other states where they do business (known as the "most favored lending" laws doctrine) (439 U.S. 299 (1978)). Bank branches located in states with favorable usury laws can also export that rate to customers in other states if the loans are booked in that branch. Federal preemption of state laws may also be relevant for federal banking organizations when determining whether they are subject to state usury laws (see Practice Note, Federal Preemption Issues in Banking).
In New York, usury is regulated by New York General Obligation Law Article 5, Title 5.