December 13th, 2012 at 7:00 am
(This is a guest blog post by Leah Gonzalez, a master’s degree student in social work at the University of Texas in Austin and a graduate of Howard Payne University.)
The term used to describe illegally high interest rates applied to loans is “usury.” Usury laws set caps for interest rates of consumer and commercial loans. Payday and auto title loans are considered consumer loans.
The Texas Finance Code sets strict rate and fee limits for various types of consumer loans, including auto title loans and payday loans, technically called “deferred presentment transactions.” The Texas Constitution contains a provision which states that in the absence of a regulated rate, any interest over 10 percent per year is considered usurious.
One of the main issues concerning payday and auto title lenders is their ability to use the Credit Service Organization code, register as a Credit Access Business (CAB), partner with a third party lender and essentially bypass the Finance Code regulations and the 10 percent limit. They do so because the CAB earns outrageous fees, not considered interest for usury purposes, while the third party lender collects interest under the 10 percent constitutional limit.
Opponents of usury laws claim these strict laws limit the ability of consumers to build credit and establish a basis for economic independence. Low interest rates could potentially make it difficult for lenders to provide loans. Essentially, the idea is that “lenders will not lend if it is unproﬁtable” (Rigbi, 2010). When lenders can’t lend, consumers lose the ability to receive the loans needed to access resources (for instance, to buy a car or to pay bills) that could assist in fostering economic growth. Usury laws are seen as tools to keep people down, and further divide the socio-economic gap.
Those in favor of usury laws stand on the side of the consumer. Usury laws regulate the practices of the lender, providing a standardized measure ensuring the borrower’s rights. Historical support of usury laws comes from Adam Smith, a philosopher and pioneer of modern economics. Smith expressed how high interest rates will deter consumers who can feasibly repay a loan because of the options they have available. Consumers who are desperate enough to take on a high-interest-rate loan don’t have the means to repay (Smith, 1776).
Usury laws vary from state to state, with similarly varying enforcement. When push comes to shove, these laws may be useless if industries are finding legal ways around them.
(1998). Usury laws the bad side of town. The Economist. Retrieved from http://www.economist.com/node/177558 .
Rigbi, O. (2010). The eﬀects of usury laws: evidence from the online loan market. Ben-Gurion University. Retrieved from http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CDMQFjAA&url=http%3A%2F%2Fecon.hevra.haifa.ac.il%2F~todd%2Fseminars%2Fpapers08-09%2FRigbi_Usury_Laws.pdf&ei=OPayUNHaFqr42gXEz4GYAg&usg=AFQjCNGUDVLiOxM8rXpPQOSK4GJ1519jIA&sig2=NINlA4NGVvwFe6BhIuQMuQ .
Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations. Oxford Text Archive. Retrieved from www.writersinspire.org/content/inquiry-nature-and-causes-wealth-nations-adam-smith-two-volumes-pt1 .