Usury is defined in Webster’s as, “the lending or practice of lending money at an exorbitant interest.” All states, including Maryland, have laws prohibiting usury—in Maryland, the default rate of interest is 6%, and most loans cannot exceed 24%. So how is it that many credit cards have annual rates of 30% or more? How is it that payday loans and tax refund loans have interest rates over 300%?
The answer lies in the federal National Bank Act and a series of Supreme Court decisions.
The National Bank Act, first adopted in 1863, provides for the establishment and regulation of national banks. For more than 100 years, that law was interpreted to require that even national banks can only charge interest at the rate allowed by the state in which its customer is located. In 1978, the Supreme Court changed everything. In Marquette National Bank v. First of Omaha Corp., it ruled that a national bank can charge its customers, no matter where they are located, interest at the rate allowed by the state in which it is located. Even though the customers in Marquette were located in Minnesota, the fact that the bank was centered in Nebraska allowed it to charge its Minnesota customers the higher Nebraska interest rate.
Shortly after Marquette was decided, North Dakota pretty much repealed its usury statutes. National Banks descended like a horde of locusts on that state, establishing their main offices there. CitiBank was the first, and others followed its lead. North Dakota’s interest rate cap—or the lack of an interest rate cap—became the de facto national interest rate on credit cards. Ever wonder why so many of your credit card payments are sent to North Dakota? This is why.
The practical effect of Marquette was to repeal every state’s usury laws insofar as they deal with National Banks. And any lender that wants to charge exorbitant interest and still follow the letter need only form a National Bank, and the sky’s the limit.