The History of Usury

With credit to James M. Ackerman,  Interest Rates and the Law:  A History of Usury, 1981, Arizona St. L.J.61 (1981)

What do Hammurabi, Plato, Charlemagne, Dante and Queens Mary and Elizabeth have in common?  They all condemned, outlawed or regulated the charging of interest on loans.  In fact, until the early 1900s interest rates in the United States were kept at or near 10%.  And until 1979, loan laws provided some interest rate cap in every state.

Then everything changed.  Governments and banks put profits before people. And now the lending industry is spiraling out of control.

u·su·ry (yoo’zhe-ree)  n.pl. u·su·ries

1. The practice of lending money and charging the borrower interest, especially at an exorbitant or illegally high rate.
2. An excessive or illegally high rate of interest charged on borrowed money.
3. Archaic. Interest charged or paid on a loan.

Old Testament The Prophet Ezekiel includes usury in a list of “abominable things,” along with rape, murder, robbery and idolatry. Ezekiel 18:19-13.

Jews are forbidden to lend at interest to one another.  Exodus 22:25; Deuteronomy 23:19-20, Leviticus 25:35-37.

1750 B.C. The Code of Hammurabi regulates the interest that can be charged on a loan.  Historical records indicate that many loans were made below the legal limit.

800-600 B.C. Both Plato and Aristotle believed usury was immoral and unjust.  The Greeks at first regulate interest, and then deregulate it. After deregulation, there was so much unregulated debt that Athenians were sold into slavery and threatened revolt.

443 B.C. The Romans adopt the “Twelve Tables” and cap interest at 8 1/3%.

88 B.C. The Roman usury rate is raised to 12%.

533 A.D. The Roman “Code of Justinian” sets a graduated maximum interest rate that did not go over 8 1/3 % for loans to ordinary citizens.  This law lasts until 1543 A.D.

7th centruy The Quran 2:275-276 states:  “…those you take usury will arise on the Day of Resurrection like someone tormented by Satan’s touch. That is because they say ‘Trade and usury are the same,’ But God has allowed trade and forbidden usury. Whoever, on receiving God’s warning, stops taking usury make keep his past gains — God will be his judge — but whoever goes back to usury will be an inhabitant of the Fire, therein to remain.”

800 A.D. Charlemagne outlaws interest throughout his empire.

11^th century In England, the taking of any interest at all is punishable by taking the usurer’s land and chattels.

Medieval Canon Law Usury is punishable by ex-communication.

Medieval Roman Law Usurer’s are fined 4X the amount taken, while robbery is penalized at twice the amount taken.

1306-1321 Dante pens “The Inferno,” in which he places usurers at the lowest ledge in the seventh circle of hell – lower than murderers.

1553-1558 During the reign of Queen Mary, English Parliament again disallows the collection of interest.

1570 During the Reign of Queen Elizabeth, interest rates in England are limited to under 10%. This law lasts until 1854.

1713 Adoption in England of the “Statue of Anne,” an Act to reduce interest rates.

Early 18^th Century American colonies adopt usury laws, setting the interest cap at 8%.

After 1776 All of the States in the Union adopt a general usury.  Most states set the interest limit at 6%.

Early 1900s A move to deregulation causes 11 states to eliminate their usury laws.  Nine more states raise the usury cap to 10% or 12%.  Banks are not making personal loans.  “Salary Lenders” fill the need by “purchasing” a worker’s future wages in exchange for a high fee – equal to a lending rate of 10% – 33%.

1916 A Uniform Small Loan Law allows specially-licensed lenders to charge higher interest rates—up to 36%—in return for adhering to strict standards of lending.

1945-1979 All states adopt special loan laws that cap interest at higher than the general usury rate—at 36%—but cap it nevertheless.

1977 The federal government passes the “Community Reinvestment Act” (CRA) which requires banks to invest in their communities.

1978 The US Supreme Court decides that national banks may export the state interest rate law of their home state into any state where they do business.  In response, South Dakota eliminates its interest rate caps.  Several credit card issuing banks move to South Dakota and  operate nationally with no interest rate cap.

1980 Congress preempts state interest rate controls on all first lien mortgages.  This enables predatory mortgage lenders to make seemingly affordable loans, like adjustable rate and interest-only loans, that lead to foreclosure for many.

1994 Congress adopts the Home Ownership and Equity Protection Act of 1994, which provides some substantive protections to home mortgage borrowers with interest rates or points that are extraordinarily expensive, but sets no limits on what can be charged for these loans.

1994-2005 Many states and cities try to protect their citizens by adopting state statutes and local ordinances to curb predatory lending, but preemption claims by the federal government impede their efforts.  Numerous bills are introduced in Congress to protect consumers in a wide range of transactions, including rent-to-own, credit cards, payday lending, and predatory mortgage lending, but none of these bills makes it to a hearing.

2001 – 2007 Predatory and mainly subprime lenders make home loans to people who cannot afford them, boosting their own profits in the short term.  Many of these loans are packaged and sold to Wall Street.

2005 After extensive pressure from the industry, the federal government changes bankruptcy laws, making it harder for consumers to discharge debts and get a clean start in bankruptcy.

2006 Congress passes the “Talent Amendment” which caps interest on loans made to active military personnel and their families at 36%, reacting to findings that high-cost payday lenders had been targeting the military.

2007 Foreclosure rates begin to increase dramatically as a result of predatory mortgage lending.

2008 Unpaid mortgages cause mortgage-backed securities on Wall Street to continue to “go bad,” triggering widespread economic downturn in both the United States and around the world.  Some commercial and investment banks go bankrupt, and some are the object of government “bailouts.”

2009 The passage of the Credit CARD Act, which greatly curtails abusive credit card lending.

2010 The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which creates a Consumer Financial Protection Bureau to rein in predatory lending (though it cannot pass usury caps).  The bill also reforms some of Wall Street’s greedy and excessive practices.