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1.2.2 General Usury Statutes in the United States

English usury statutes were adopted by the American colonies prior to independence.25 Variations on these statutes remain in effect to this day in many states, and are commonly referred to as “general” usury laws because they purport to set a ceiling for all loans of money in a jurisdiction, not just for particular types of lenders or credit transactions. With very few exceptions, general usury laws were the only statutes regulating credit costs in the United States prior to the twentieth century.

The importation of the English statutes was accompanied by the importation of the preexisting English case law. The understanding of credit regulation developed in the English case law was adopted by American courts and represents an important source of authority in the interpretation of modern usury statutes. It is, at least in effect, a common law of usury. In the absence of express statutory treatment, this case law governs issues such as the elements of proof of a usury case and the definition of interest.

Many of the inconsistencies and irrationalities that exist in current credit laws can be traced to English case law and, through it, to even earlier origins in common law or canon law. For example, the English courts ruled that a sale of goods on credit did not constitute a loan or forbearance and was thus exempt from the interest limitations of usury statutes.26 This rule, known as the time-price doctrine, was adopted by American courts27 and, despite much criticism, is still recognized in some states today. The time-price doctrine is the source of the separate regulation of loans and credit sales in virtually all states.

Another example of the ancient roots of modern usury law principles is the distinction between interest on a loan and “penalties,” such as late fees, which can be assessed on overdue accounts without usury limitations. While many modern consumer statutes separately regulate late fees, most states codified the general distinction between interest and fees. This distinction between interest and fees appears to have come to American law, through English case law, from a canon law rule that one could not exact gain from a loan (i.e., charge any interest), but that one could be compensated for loss incurred through a loan, including the loss suffered when the loan was not promptly repaid.28 This convenient doctrine appears to have been used in the Middle Ages to evade the church’s prohibition against interest,29 just as it is used today to evade laws which limit the amount of interest that a lender may charge.30

Beginning with the small loan laws adopted in the early years of the twentieth century, states created numerous “special” usury laws to govern particular types of lenders. These special usury laws, discussed in the next subsections, have displaced general usury laws for large parts of the consumer credit market. General usury laws remain relevant, however, for creditors—primarily fringe creditors—that do not fit under one of the special usury laws or that choose not to comply with the licensing requirements and substantive restrictions of those laws.

Footnotes

  • 25 {24} See generally Christopher L. Peterson, Usury Law, Payday Loans, and Statutory Sleight of Hand: Salience Distortion of American Credit Pricing Limits, 92 Minn. L. Rev. 1110 (Apr. 2008) (discussing the adoption of the Statute of Anne by the colonies and the usury statutes in existence at independence); Christopher L. Peterson, “Warning: Predatory Lender”—A Proposal for Candid Predatory Small Loan Ordinances, 69 Wash. & Lee L. Rev. 893, 899–900 (2012).

  • 26 {25} See Beete v. Bidgood, 7 B. & C. 453, 108 Eng. Rep. 792 (K.B. 1827).

  • 27 {26} See Hogg v. Ruffner, 66 U.S. (1 Black) 115 (1861).

  • 28 {27} The common law rule in turn seems to derive from Roman law. See Homer, A History of Interest Rates 73–74 (1963).

  • 29 {28} J.B.C. Murray, History of Usury (1866).

  • 30 {29} See § 5.7, infra (discussing the treatment of late fees under modern usury law).