Interest rate limits in the United States are one of the oldest forms of consumer protection. These limits are called usury laws, and they’ve existed for centuries. At the time of the American Revolution, every state in the Union had interest rate limits.
That’s according to Lauren Saunders, Associate Director of the National Consumer Law Center, a nonprofit organization that advocates for consumer reform.
“But in the last few decades, banks have managed to escape interest rate limits,” Saunders says. “Banks generally can charge whatever they want, and they can ignore state law. So, predatory lenders have been trying to find a way to use banks to get around interest rate limits so they can charge high, astronomical rates that states don’t allow. We call this ‘rent-a-bank’ lending.”
“Rent-a-bank” schemes work like this: A payday lender will place a bank’s name on a loan. Because national banks have no limit on charging interest rates under the National Bank Act of 1864, that loan can have an interest rate higher than the state cap. The bank, which holds the loan, will then sell it back to the payday lender.
That means payday lenders can use banks as cover for charging exorbitant interest rates. And payday lenders can charge Interest rates that exceed what’s allowed by each state.
Since the 1800s, the Supreme Court has held that contracts concerning the interest rate on a loan won’t be upheld if they were formed with the intent to…