LENDING: Useless Usury Laws

With usura hath no man a house of good stone.

—Ezra Pound, Canto XLV

That line strikes a deep chord of almost mystical belief that is still embodied in today’s anti-usury laws, which set ceilings on interest rates. All 50 U.S. states have some form of these laws. In an era when the Government counts on rising interest rates to cool an inflationary economy, they are bothersome anachronisms—or would be, if they were effective. In fact, most are so riddled with exceptions that they apply mostly to mortgage loans. In that field, though, they are causing enough trouble to indicate that Pound’s line would be more accurate if it read: “Without usura hath no man a house …”

The problem is that in such states as New York, New Jersey and Minnesota, usury laws limit mortgage-loan interest to about 8%. Bankers complain that in today’s market, this is so unprofitable that it discourages them from making loans to finance the buying of houses. “If bankers are paying out 10½% to 11% to get short-term money, and the prime rate is 9¼%, then they cannot lend at 8%,” says Robert Greenberg, of the state real estate board in New York.

In several states, lenders are lobbying to raise the usury ceilings. They face strong opposition from critics who point out that mortgage lending has been running at a faster pace than a year ago (though it has begun to come down in the past month or so). In New Jersey, AFL-CIO officials want a rollback of permissible interest to 6%, contending this would enable people of modest incomes to afford housing. Oliver Jones, executive vice president of the Mortgage Bankers Association, calls such attitudes “medieval.”

In fact, the beliefs enshrined in the usury laws are much older than medieval. For many centuries, the term usury referred to the taking of any interest at all. The Book of Deuteronomy strongly prohibits collecting interest. The reason: lending to a brother in need is a duty required by love, not to be corrupted by the profits of interest. In ancient Greece, Aristotle condemned interest as “most unnatural,” and early Christians deemed it sinful. Because Christians could not make interest-bearing loans in medieval Europe, borrowers turned largely to Jews. Only in the 16th century, after the Reformation and John Calvin’s defense of interest under certain conditions, did lawmakers begin redefining usury as the collecting of “excessive” interest. In England, Henry VIII set an interest ceiling of 10%, which some U.S. mortgage lenders would like to see put into effect now.

Today, outside the mortgage field, U.S. usury laws are full of holes; business loans, car loans and charge accounts are almost always exempted. As borrowers have been discovering since the federal Truth in Lending law took effect in 1969, they pay as much as 20% on loans from finance companies and even 36% annual interest on mail-order loans. So long as such rates are permitted, usury laws are useless and should be scrapped.