Usury is the unlawful act of charging interest on a debt (including discount points, fees and other charges) at a rate greater than what is permitted under any applicable law or exemption from a law. Usury laws are regulations governing the amount of interest a lender can charge on a specific loan. The law setting caps on the maximum amount of interest that can be levied. These laws are designed to protect consumers from predatory lending practices. Usury is the charging of interest beyond what the law allows. If your state has a usury law, the creditors cannot exceed the limits set by the state, except that when you approach out of state lenders, they are not necessarily bound by your state law. They may be bound by the law of their states. For example banks located in South Dakota or Delaware have much better protection against usury law. See. Smiley v.Citi Bank ( 517 U.S. 735), is a 1996 U.S Supreme Court decision upholding a regulation of the Comptroller of Currency which included credit card late fees and other penalties within the definition of interest and thus prevent individual states from limiting them when charged by nationally- chartered banks. In the United States, individual states are responsible for setting their own usury laws. Though this type of financial activity could fall under the Constitution's commerce clause, Congress hasn't traditionally focused on usury.Although creditors may charge exorbitant interest, they may pay an even higher price for violating state usury laws. Although statutory remedies vary among states, some common penalties include invalidation of a borrower’s obligation to pay interest, recovery of double even triple the usurious interest paid, nullification of a loan contract or assessment of fines ranging between three and six figures. Some states impose severe criminal penalties amounting to imprisonment.
Marquette National Bank v. First of Omaha Service Corporation
The most important federal case in credit card interest rate deregulation was decided in 1978. Marquette National Bank v. First of Omaha Service Corporation involved Minnesota-based Marquette National Bank of Minneapolis and First National Bank of Omaha, headquartered in Nebraska.Minnesota usury law capped the state’s interest rates on loans at 12 percent. Under Nebraska usury law, banks could charge up to 18 percent. Minnesota banks imposed annual fees to make up the difference. First of Omaha then offered credit cards with no annual fees to Minnesota residents, for which Marquette sued in violation of Minnesota usury law.
In the 1996 case of Smiley v. Citibank, Barbara Smiley of California had been charged a $15 late fee on her credit card bill, which she argued in court violated California state law. She filed a class action lawsuit against Citibank’s credit card division in South Dakota and lost.The Supreme Court upheld Citibank’s justification that the late fee was charged as interest on Smiley’s credit card. Under the National Bank Act, the term interest included fees, making them immune to state regulation. From that point forward, late fees and other fees increased from $10 or $15 to as high as $39.