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Consumer Credit Regulation: 3.11.10 Criminal Usury Statutes

Some states, even when deregulating their civil usury statutes, retain their criminal usury ceilings.1069 Similarly, even if a civil usury statute exempts business loans1070 or does not apply to defaulted debt,1071 a criminal usury ceiling still may apply. Criminal usury statutes are typically found in the state criminal code.

Consumer Credit Regulation: 3.12.1 General

Legislative amendments may strengthen or weaken existing state usury statutes, and the question arises whether transactions taking place before that amendment are governed by the old or new statute. States can specify whether or not a statute is to be applied retroactively. The U.S.

Consumer Credit Regulation: 3.12.2 Variable or Floating Usury Ceilings Distinguished

A legislative amendment to a usury statute must be distinguished from a mere temporary change in the usury cap found in a floating or variable interest ceiling statute. In a variable or floating interest rate ceiling statute, the usury ceiling goes up or down in relation to a specified market rate, called the index. The index and the margin are set by statute, but the actual numerical ceiling will change without any change in statute.

Consumer Credit Regulation: 10.1.1 Installment Loans Defined

This chapter examines installment loans from non-bank lenders. These loans were a widespread form of subprime credit thirty or more years ago, but in recent years have been overshadowed by other forms of credit. As states and regulators clamp down on payday loans, however, high-rate lenders are beginning to migrate back into installment lending, offering new products with new types of abusive terms and features.

Consumer Credit Regulation: 10.1.2 The Non-Bank Lenders Addressed by This Chapter

This chapter analyzes state laws that allow installment lending by entities other than depository institutions such as banks. The chapter refers to these lenders generically as “non-bank lenders.” The typical state installment loan statute requires these non-bank lenders to obtain state licenses, at which point they are permitted to make loans on the terms and interest rates allowed by the installment loan law.

Consumer Credit Regulation: 10.1.3 The Disappearance and Resurgence of Installment Loans

Installment loans were a common form of consumer credit but have receded over the last few decades. In 1978, the U.S. Supreme Court held that banks issuing credit cards could generally ignore state interest rate caps.5 This decision led to a boom in credit card lending. Today, many consumers use credit cards for small-dollar credit,6 instead of taking out installment loans.

Consumer Credit Regulation: 10.1.4 Types of Installment Loan Legislation

State installment loan laws fall into several patterns. Some are based on the Uniform Consumer Credit Code (UCCC). As discussed in more detail in § 2.3.10, supra, the National Conference of Commissioners on Uniform State Laws (now known as the Uniform Law Commission) promulgated a comprehensive code for consumer credit in 1968, with a revised version in 1974.

Consumer Credit Regulation: 10.1.5 Scope of State Installment Loan Laws

State installment loan laws have widely varying scope provisions. Some apply to loans regardless of their purpose, while others apply only to consumer loans.37 Many exclude a list of specific types of loans, such as farm loans and mortgage loans. It is also common for these statutes to exclude a list of certain types of lenders such as banks, credit unions, and pawnbrokers. Many apply only to loans of up to a specified principal amount or up to a specified length.38

Consumer Credit Regulation: 10.1.6.1 Preemption

In general, there is little federal preemption of state law as applied to the non-bank, non-mortgage lenders that this chapter addresses. Federal law preempts the application of state law to national banks and federal savings associations if the federal law would significantly interfere with the exercise of their powers.43 However, these laws are preempted only as to the national bank or federal savings association itself.

Consumer Credit Regulation: 10.1.6.2 Rate Exportation

National banks and federal savings associations can export their home state’s interest rates,47 and this right extends to federally insured state depository institutions.48 However, a non-depository lender cannot export another state’s rates for loans it originates, even if it sells the loan to a depository.49

Consumer Credit Regulation: 10.1.7 State Installment Loan Laws’ Anti-Evasion Provisions

Recognizing the perverse creativity of predatory lenders and the impossibility of drafting a perfect statute, many small loan laws expressly ban attempts to evade the law’s limitations.51 Such provisions are sufficiently general to address tactics not expressly described in the law or even envisioned when the law was passed.52 This type of statute helps ensure that courts and regulators enforce the remedial spirit of small loan laws.53

Consumer Credit Regulation: 10.1.8 State Installment Loan Law Remedies

The statutory remedies available for violations of state installment loan laws vary widely. Statutes often set different remedies for unlicensed lending and for other violations.58 There are usually further differences between the remedies available to consumers and regulators. Some states have both civil and criminal penalties for violations.

Consumer Credit Regulation: 10.1.10 Other Legal Claims

In addition to any statutory remedies provided by state law, consumers may have common law and federal claims. Illegal lending is often accompanied by other misconduct, including misrepresentation, fraud, illegal debt collection, and disclosure violations. These claims may provide an opportunity for punitive damages at common law, as well as attorney fees and statutory damages under other state or federal laws.

Consumer Credit Regulation: 10.2.1 State Law Interest Rate Caps

Although some states have repealed their caps for closed-end consumer installment loans, a 2017 report showed that all but seven states still capped both interest rates and loan fees such as origination fees or monthly loan fees that are imposed as a condition of the extension of credit for a six-month $500 loan, and all but ten states capped them for a two-year $2,000 loan.75 The interest rate cap and allowable additional loan fees vary dramatically from state to state, with effective rates ranging from 16% to 116% for a $500 six-month loan.

Consumer Credit Regulation: 10.2.3 Uncapped Loan Fees

Many installment loan statutes allow the lender to charge loan fees in addition to interest, but they place a cap on the amount of each fee that can be charged. Nevertheless, some statutes cap most, but not all, loan fees. Interpreting such a statute as placing no limits whatsoever on the amount of the uncapped fee would render the other caps on fees and interest rates meaningless, a result that the legislature is unlikely to have intended.

Consumer Credit Regulation: 10.2.4.1 General

Loan fees can be disguised as third-party fees. For example, if a lender charges a borrower $12 for registering a lien on a vehicle title when the cost to the lender is actually just $4, the $8 overage is a disguised origination fee.99 Another ruse is a fee paid to a broker that is then funneled back to the lender and charged on top of the purported loan rate.

Consumer Credit Regulation: 10.2.4.2 Credit Service Organization Fees

One of the more egregious examples of a loan fee masquerading as a third-party fee involves use of a credit service organization (CSO). A CSO is a purportedly independent third party that arranges or brokers loans for a fee. About thirty states have laws regulating credit services organizations (CSOs).103 These laws, although primarily aimed at “credit repair” operations, often include within their scope companies that arrange extensions of credit for consumers.

Consumer Credit Regulation: 10.2.5 Loan Splitting

The way interest caps for certain state installment loan laws are set out may give lenders an incentive to engage in loan splitting. For example, if the lending law allows a higher interest rate on the first $1,000 of a loan than on the remainder, a lender may seek to split a $1,500 loan into two $750 loans in order to charge the higher rate on the full $1,500. A lending law may allow an interest rate that is higher than that allowed by a more general usury law, but only for loans below a certain amount.

Consumer Credit Regulation: 10.2.6.2.1 States that do not have APR caps but prohibit unconscionability

A prohibition of unconscionability has some potential to act as an outer limit on finance charges in the states that do not provide a numerical cap on rates.139 As of the end of 2022, of the states that do not provide a numerical cap on interest rates for some or all loans between $500 and $2,500, five—Alabama, Idaho, South Carolina, Utah, and Wisconsin—do provide a cap of sorts in the form of a statutory prohibition of unconscionability in the state lending law.

Consumer Credit Regulation: 10.2.6.2.2 Examples of the application of an unconscionability standard to high-rate installment loans

State ex rel. King v. B&B Investment Group144 is an example of the application of a prohibition of unconscionability in a state deceptive practices statute to a high-cost installment loan. In that case, a suit brought by the state attorney general, the New Mexico Supreme Court in 2014 held that a subprime lender’s unsecured loans were procedurally and substantively unconscionable. The lender had formerly made payday loans in the state, but moved into unsecured installment lending when the state enacted payday loan reforms.

Consumer Credit Regulation: 10.2.6.2.3 The absence of a rate cap does not prevent the application of an unconscionability standard

The fact that a state does not cap interest rates and charges does not mean that those charges cannot be found unconscionable. Stressing the differences between an unconscionability standard and a numerical rate cap, the California Supreme Court held in De La Torre v. CashCall, Inc.154 that the fact that the legislature had not chosen to place a numerical cap on interest for loans of $2,500 or more did not prevent the court from applying the unconscionability standard to such loans.