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1.2.5 Deregulation of Usury Law

The late 1970s and early 1980s were watershed years for usury law. As a result of anti-inflation federal monetary policy, short-term commercial market interest rates rose above twenty percent, far above general usury ceilings and many special usury law ceilings. Because lenders themselves borrow the money they lend, lenders’ profits were squeezed as their interest expenses rose. There was a fear that creditors would be understandably reluctant to lend money at rates below their cost of funds and that mortgage loans and other kinds of consumer credit would dry up as creditors cut back on their volume of lending. Legislators and the credit industry agreed that something had to be done about usury laws, and action was taken at both the federal and state levels.

In 1980, in response to the tension between usury ceilings and rising market interest rates, the federal government preempted many, but not all, state usury limitations.47 Congress allowed all federally insured depository lenders and, temporarily, all creditors issuing business or agricultural credit in excess of $1,000, to operate under a variable interest ceiling, which had previously been reserved for national banks.48 Congress also preempted all interest ceilings for most major lenders for credit secured by first mortgages on borrowers’ homes, including manufactured homes.49 Congress did not replace the state usury caps it preempted with a federal usury cap; the federal framework presumed that no credit regulation was good credit regulation. States could “opt out” of any of these preemptions by legislative proclamation. This statutory structure shifted the legislative burden to the proponents of usury laws; if a state failed to adopt new usury provisions or to reenact its old ones, most usury restrictions in the state were, by default, repealed.

Some federal preemption is conditioned on the creditor’s compliance with federal regulations. Thus, preempted state statutes that remain on the books may still have some teeth when the creditor fails to comply with federal regulations.50 These preempted state statutes may also have teeth against small, individual, hard-money lenders.51

Because of the federal usury preemptions, state legislatures were forced to consider what role, if any, usury statutes should play in a modern economy. This was not exactly a new issue,52 yet there was no consensus on the correct balance between consumer protection and credit availability or if, indeed, there was a necessary tradeoff between those two desirable ends.53 Most states had in place a fairly complex set of general and special usury statutes, some of which, such as the small loan acts and RISAs, were relatively uncontroversial, and some of which, such as fixed-rate general usury statutes, were clearly unworkable in the face of sizeable fluctuations in market interest rates.

Most states responded by raising their interest ceilings to a point not constricting on traditional lenders. Other states modified their general usury laws so that the ceilings would fluctuate with some published market interest rate. For example, several states set their ceilings to five or six percentage points above the federal discount rate. Some states repealed general usury ceilings completely, allowing parties who were not regulated by special usury statutes to contract for the payment of any agreed rate.54

Generally, states retained their special usury statutes, only raising or repealing the interest rate ceilings.55 In retaining the special usury statutes, the states tacitly recognized the need for some regulation of the credit market.

Federal preemption of state consumer regulation was not limited to interest rate caps. Beginning in the 1980s,56 federal banking regulators aggressively preempted state restrictions on the origination and terms of consumer credit for lenders they regulated, without adopting any meaningful regulatory framework in its place.57 Commentators warned that the scope of deregulation posed a threat to federalism and the dual banking system58 and enabled destructive and discriminatory credit practices.59 The reach of federal deregulation was extended by state parity laws, which treat state licensed entities comparably with federally regulated lenders.60

Footnotes

  • 47 {46} See Ch. 3, infra (detailed discussion of federal usury preemption). See also Patricia A. McCoy & Elizabeth Renuart, The Legal Infrastructure of Subprime and Nontraditional Home Mortgages, in Borrowing to Live: Consumer and Mortgage Credit Revisited 110, 112 (Nicolas P. Retsinas & Eric S. Belsky ed. 2008); Cathy Lesser Mansfield, The Road to Subprime “HEL” Was Paved with Good Congressional Intentions: Usury Deregulation and the Subprime Home Equity Market, 51 S.C. L. Rev. 473 (2000); James J. White, The Usury Trompe l’Oeil, 51 S.C. L. Rev. 445 (Spring 2000); Ch. 3, infra.

  • 48 {47} The temporary business and agricultural preemption expired Apr. 1, 1983.

  • 49 {48} 12 U.S.C. § 1735f-7a. See § 3.7.2, infra.

  • 50 {49} See § 3.7.2, infra.

  • 51 {50} See, e.g., Abir v. Malky, Inc., 873 N.Y.S.2d 350 (N.Y. App. Div. 2009) (finding foreclosure rescue loan made at interest in excess of 25% usurious).

  • 52 {51} Cf. In re Coxson, 43 F.3d 189 (5th Cir. 1995) (noting that Texas had abolished usury laws during Reconstruction, but “credit abuses arose in the absence of usury laws,” and they were reintroduced). See generally § 1.2.1, supra (summarizing the evolution of usury regulation in England).

  • 53 {52} 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) (describing the “decompression” of usury regulation in the states and the lack of consensus or uniformity on how to regulate the cost of credit); Robert Mayer, Loan Sharks, Interest-Rate Caps, and Deregulation, 69 Wash. & Lee L. Rev. 807 (2012); Justice David Baker & MacKenzie Breitenstein, History Repeats Itself: Why Interest Rate Caps Pave the Way for the Return of the Loan Sharks, 127 Banking L.J. 581 (2010).

  • 54 {53} See § 7.6, infra (discussing the interpretation of “agreed rate” statutes); 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) (listing seven states without any interest rate cap); Leah A. Plunkett & Ana Lucia Hurtado, Small Dollar Loans, Big Problems: How States Protect Consumers from Abuses and How the Federal Government Can Help, 44 Suffolk U. L. Rev. 31 (2011).

  • 55 {54} See Appx. A, infra.

  • 56 {55} Richard B. Freeman, Reforming the United States’ Economic Model After the Failure of Unfettered Financial Capitalism, 85 Chi.-Kent L. Rev. 685, 687–688 (2010). See generally §§ 3.2–3.5, infra.

  • 57 {56} See Wall Street and the Financial Crisis: The Role of Bank Regulators: Hearing Before the Subcomm. on Investigations of S. Comm. on Homeland Security and Governmental Affairs, 111th Cong. 2d Sess. (2010) (memorandum by Sen. Carl Levin, Chair, & Sen. Tom Coburn, Ranking Minority Member) (discussing failure of Office of Thrift Supervision and Federal Deposit Insurance Corporation to exercise regulatory authority over Washington Mutual before the bank imploded); Modernizing Bank Supervision and Regulations: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 111th Cong. (Mar. 2009) (statement of Sheila C. Bair, Chairman, Fed. Deposit Ins. Corp) (stating that federal preemption of state consumer protection laws “resulted in a ‘race-to-the-bottom’ mentality” and advocating for abandonment of preemption of more protective state credit regulation); Richard B. Freeman, Reforming the United States’ Economic Model After the Failure of Unfettered Financial Capitalism, 85 Chi.-Kent L. Rev. 685, 687–688 (2010); Patricia A. McCoy & Elizabeth Renuart, The Legal Infrastructure of Subprime and Nontraditional Home Mortgages, in Borrowing to Live: Consumer and Mortgage Credit Revisited 110, 132–133 (Nicolas P. Retsinas & Eric S. Belsky ed. 2008) (tracing this history); Christopher L. Peterson, Preemption, Agency Cost Theory, and Predatory Lending by Banking Agents: Are Predatory Lenders Biting Off More Than They Can Chew?, 56 Am. U. L. Rev. 515 (2007); Lloyd T. Wilson, Sometimes Less Is More: Utility, Preemption, and Hermeneutical Criticisms of Proposed Federal Regulation of Mortgage Brokers, 59 S.C. L. Rev. 61 (2007) (discussing the failure of existing and proposed federal regulation to grapple with broker abuses); Ctr. for Community Capital, The Preemption Effect: The Impacts of State Anti-Predatory Lending Laws on the Foreclosure Crisis (2010), available at www.ccc.unc.edu (finding that OCC preemption of state anti-predatory lending laws led to increased risky refinance lending by regulated lenders); Ctr. for Responsible Lending, National Bank Regulator Enabled Overdraft Abuses (Feb. 2010), available at www.responsiblelending.org (cataloging abusive features of overdraft loans and Office of Comptroller of the Currency’s failure to address effectively those abuses). See generally Ch. 3, infra.

  • 58 {57} See, e.g., Baher Azmy, Squaring the Predatory Lending Circle: A Case for States As Laboratories of Experimentation, 57 Fla. L. Rev. 295 (2005); Christopher L. Peterson, Federalism and Predatory Lending: Unmasking the Deregulatory Agenda, 78 Temp. L. Rev. 1 (2005); Arthur E. Wilmarth, Jr., The OCC’s Preemption Rules Exceed the Agency’s Authority and Present a Serious Threat to the Dual Banking System, 23 Ann. Rev. Bank. L. 288 (2004).

  • 59 {58} See, e.g., William C. Apgar, Joint Ctr. for Hous. Studies, Getting on the Right Track: Improving Low-Income and Minority Access to Mortgage Credit After the Housing Bust 13–14 (2012); Andrew Kuntz, Sub-Prime Protection: The Inadequacies of the Federal Response to the Economic Crisis in Protecting Minorities from Predatory Lending, 13 Rutgers Race & L. Rev. 219, 222–227 (2011); Cassandra Jones Havard, Democratizing Credit: Examining the Structural Inequities of Subprime Lending, 55 Syracuse L. Rev. 233 (2006).

  • 60 {59} See § 3.6, infra.