The U.S. Supreme Court has agreed to hear arguments in a case that challenges the constitutionality of the funding of the federal Consumer Financial Protection Bureau (CFPB), “a 21st century agency that implements and enforces Federal consumer financial law and ensures that markets for consumer financial products are fair, transparent, and competitive.” The agency was created by the Dodd-Frank Act after the 2008 financial crisis.
The case
The case began in 2018 in the U.S. District Court for the Western district of Texas as the Community Financial Services Association of America, Ltd. v. Consumer Financial Protection Bureau. It was brought on behalf of certain payday lenders and credit-access businesses affected by the “Payday, Vehicle Title, and Certain High-Cost Installment Loans” Rule issued by the CFPB that limited certain practices by covered lenders that were deemed “unfair, deceptive, or abusive.” The court ruled in favor of the defendant. On appeal, the U.S. Court of Appeals for the Fifth Circuit in New Orleans in 2022 reversed the judgment of the district court and voided the CFPB rule, which prohibited payday lenders from debiting the accounts of customers behind on a payment without first getting their consent.
The court ruled that CFPB’s funding by the Federal Reserve instead of by congressional appropriation was unconstitutional. Wrote Judge Cory Wilson in the ruling:
Because the funding employed by the Bureau to promulgate the Payday Lending Rule was wholly drawn through the agency’s unconstitutional funding scheme, there is a linear nexus between the infirm provision (the Bureau’s funding mechanism) and the challenged action (promulgation of the rule).
The case of Consumer Financial Protection Bureau v. Community Financial Services Association of America, Limited will not be decided by the Supreme Court until its next term, which begins in October. Although the case was originally about just the Payday Lending Rule, it could possibly result in the upending of all of its rules. As explained by regulatory attorneys Anthony DiResta and Luis Garcia of Holland & Knight:
The Fifth Circuit’s ruling potentially calls into question every single rule, guidance and order that the CFPB has issued — as they all trace their origins to the CFPB’s unconstitutional self-funding structure.
Democrats, liberals, and progressives are in a panic that the Supreme Court could kill the CFPB, although, if it were abolished, authority under the 18 preexisting federal consumer-protection laws would revert to other federal agencies. The left-leaning Constitutional Accountability Center deemed the Fifth Circuit’s decision “as wrong as it is dangerous.” The decision “is wrong because it is at odds with the plain text of the Constitution, not to mention clear Supreme Court precedent.” The decision “is dangerous because it will impede the ability of the CFPB to do its critically important work of protecting America’s consumers — and because its reasoning calls into question the actions of countless other federal financial regulators, including the Federal Reserve Board.”
We can only hope. Writing for The American Prospect, David Dayen expresses grave concern that “there are numerous other crucial programs and regulators that are funded in a similar manner to CFPB, and an enterprising conservative Supreme Court justice could potentially seek to nix the funding mechanisms of those programs too.”
Again, we can only hope. He fears that “a creative and determined conservative judge could easily state that the plain language of the Constitution rejects all mandatory spending, making Social Security, Medicare, food stamps, welfare benefits, and more illegal.”
Once more, we can only hope. Writing for Truthout, Sharon Zhang returns to the issue that prompted this case to begin with:
One outcome of the CFPB potentially being defunded is that it could be open season by payday lenders on people in desperate need of cash.
She terms payday loans “a particularly predatory type of loan targeted toward the most vulnerable populations, often trapping the poorest borrowers into debt.”
Payday loans
According to the CFPB, a payday loan “is usually a short-term, high cost loan, generally for $500 or less, that is typically due on your next payday.” The agency then gives some common features of a payday loan:
- The loans are for small amounts, and many states set a limit on payday loan size.
- A payday loan is usually repaid in a single payment on the borrower’s next payday, or when income is received from another source such as a pension or Social Security.
- To repay the loan, you generally write a post-dated check for the full balance, including fees, or you provide the lender with authorization to electronically debit the funds from your bank, credit union, or prepaid card account.
- Your ability to repay the loan while meeting your other financial obligations is generally not considered by a payday lender.
- The loan proceeds may be provided to you by cash or check, electronically deposited into your account, or loaded on a prepaid debit card.
The real problem that the agency has with payday loans is their cost:
A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400 percent. By comparison, APRs on credit cards can range from about 12 percent to about 30 percent.
Because of the high interest rates on payday loans, “Many state laws set a maximum amount for payday loan fees ranging from $10 to $30 for every $100 borrowed.” Payday loans don’t exist in some states because they are prohibited by state law or because payday lenders choose not to do business there because of the state regulations.
On the federal level, the Military Lending Act (MLA) for active-duty service members and their dependents imposes a cap of 36 percent on the Military Annual Percentage Rate (MAPR) in addition to other limitations on what lenders can charge for payday and other types of loans.
Usury laws
These state laws regarding payday lending are the result of state usury laws. The word usury originally referred to just interest. The term then came to be applied to interest on loans that was excessive, extreme, or exorbitant. Thus, usury laws are based on an artificial and arbitrary distinction between usury and interest. Usury laws limit how much interest can be charged to borrowers on loans and vary widely from state to state.
For example, in my state of Florida, in the Florida statutes, title XXXIX, chapter 687, states:
687.03(1) Except as provided herein, it shall be usury and unlawful for any person, or for any agent, officer, or other representative of any person, to reserve, charge, or take for any loan, advance of money, line of credit, forbearance to enforce the collection of any sum of money, or other obligation a rate of interest greater than the equivalent of 18 percent per annum simple interest, either directly or indirectly, by way of commission for advances, discounts, or exchange, or by any contract, contrivance, or device whatever whereby the debtor is required or obligated to pay a sum of money greater than the actual principal sum received, together with interest at the rate of the equivalent of 18 percent per annum simple interest. However, if any loan, advance of money, line of credit, forbearance to enforce the collection of a debt, or obligation exceeds $500,000 in amount or value, it shall not be usury or unlawful to reserve, charge, or take interest thereon unless the rate of interest exceeds the rate prescribed in s. 687.071.
687.071(2) Unless otherwise specifically allowed by law, any person making an extension of credit to any person, who shall willfully and knowingly charge, take, or receive interest thereon at a rate exceeding 25 percent per annum but not in excess of 45 percent per annum, or the equivalent rate for a longer or shorter period of time, whether directly or indirectly, or conspires so to do, commits a misdemeanor of the second degree.
687.071(3) Unless otherwise specifically allowed by law, any person making an extension of credit to any person, who shall willfully and knowingly charge, take, or receive interest thereon at a rate exceeding 45 percent per annum or the equivalent rate for a longer or shorter period of time, whether directly or indirectly or conspire so to do, commits a felony of the third degree.
But go across the border into Georgia (O.C.G.A. § 7-4-2) and you will find that “the legal rate of interest shall be 7 percent per annum simple interest where the rate percent is not established by written contract.” However, where the principal amount is more than $3,000, “the parties may establish by written contract any rate of interest.”
The only exception throughout the United States is the interest rate on credit cards, where there is generally no applicable interest rate cap.
Jeremy Bentham
Where is Jeremy Bentham (1748–1832) when you need him? He is actually closer than you think. Bentham’s skeleton, clothed with one of his black suits padded with hay, and topped with a wax head, is on public display at University College London. Bentham was an English philosopher and tireless advocate of political, legal, and social reforms. He is best known as the father of utilitarianism — the concept that an action is right if it produces happiness or pleasure for the greatest number of people and wrong if it results in the opposite. The morality of the action thus depends on the consequences of the action.
Nevertheless, what concerns us here is Bentham’s first, and only, well-known work on economics, his Defence of Usury (1787). The book, which went through four editions in Bentham’s lifetime, was written as a series of letters, with the 13th letter to Adam Smith (1723–1790), who he admired, serving as a “sequel.” Although he is often thought of as a laissez-faire purist, Smith supported government-imposed ceilings on the rate of interest. He thought an interest rate of 5 percent was sufficient for any borrower in England.
Bentham did not agree. In a letter written a year before the publication of Defence of Usury, Bentham stated: “You know it is an old maxim of mine, that interest, as love and religion, and so many other pretty things, should be free.” Bentham wastes no time in stating his thesis in his first letter:
In a word, the proposition I have been accustomed to lay down to myself on this subject is the following one, viz. that no man of ripe years and of sound mind, acting freely, and with his eyes open, ought to be hindered, with a view to his advantage, from making such bargain, in the way of obtaining money, as he thinks fit: nor, (what is a necessary consequence) any body hindered from supplying him, upon any terms he thinks proper to accede to.
He then posits five arguments in defense of government-imposed interest ceilings: 1. Prevention of usury. 2. Prevention of prodigality. 3. Protection of indigence against extortion. 4. Repression of the temerity of projectors. 5. Protection of simplicity against imposition.
Bentham observed that widespread negative connotations of usury and usurers was unnatural and unreasonable:
Usury is a bad thing, and as such ought to be prevented: usurers are a bad sort of men, a very bad sort of men, and as such ought to be punished and suppressed. These are among the string of propositions which every man finds handed down to him from his progenitors: which most men are disposed to accede to without examination, and indeed not unnaturally nor even unreasonably disposed, for it is impossible the bulk of mankind should find leisure, had they the ability, to examine into the grounds of an hundredth part of the rules and maxims, which they find themselves obliged to act upon.
He made the case for the arbitrary nature of usury:
One thing then is plain; that, antecedently to custom growing from convention, there can be no such thing as usury: for what rate of interest is there that can naturally be more proper than another? what natural fixed price can there be for the use of money more than for the use of any other thing? Were it not then for custom, usury, considered in a moral view, would not then so much as admit of a definition: so far from having existence, it would not so much as be conceivable: nor therefore could the law, in the definition it took upon itself to give of such offence, have so much as a guide to steer by. Custom therefore is the sole basis, which, either the moralist in his rules and precepts, or the legislator in his injunctions, can have to build upon. But what basis can be more weak or unwarrantable, as a ground for coercive measures, than custom resulting from free choice? My neighbours, being at liberty, have happened to concur among themselves in dealing at a certain rate of interest. I, who have money to lend, and Titius, who wants to borrow it of me, would be glad, the one of us to accept, the other to give, an interest somewhat higher than theirs: why is the liberty they exercise to be made a pretence for depriving me and Titius of ours?
He questioned the inconsistency of regulating interest rates and not other prices:
Putting money out at interest, is exchanging present money for future: but why a policy, which, as applied to exchanges in general, would be generally deemed absurd and mischievous, should be deemed necessary in the instance of this particular kind of exchange, mankind are as yet to learn.
For him who takes as much as he can get for the use of any other sort of thing, an house for instance, there is no particular appellation, nor any mark of disrepute: nobody is ashamed of doing so, nor is it usual so much as to profess to do otherwise. Why a man who takes as much as he can get, be it six, or seven, or eight, or ten per cent. for the use of a sum of money should be called usurer, should be loaded with an opprobrious name, any more than if he had bought an house with it, and made a proportionable profit by the house, is more than I can see.
He wonders why it is not illegal for a lender to offer a low interest rate:
Another thing I would also wish to learn, is, why the legislator should be more anxious to limit the rate of interest one way, than the other? why he should set his face against the owners of that species of property more than of any other? why he should make it his business to prevent their getting more than a certain price for the use of it, rather than to prevent their getting less? why, in short, he should not take means for making it penal to offer less, for example, than 5 per cent. as well as to accept more?
Bentham considers the whole idea of usury prevention to be begging the question: “You, my friend, by whom the true force of words is so well understood, have, I am sure, gone before me in perceiving, that to say usury is a thing to be prevented, is neither more nor less than begging the matter in question.”
Bentham’s book was well-received in the United States, where it was reprinted numerous times and frequently cited in debates over usury laws. America’s Bentham was the poet William Cullen Bryant (1794–1878), who wrote a powerful critique of usury laws that was published in the New York Evening Post back in 1836:
The fact that the usury laws, arbitrary, unjust, and oppressive as they are, and unsupported by a single substantial reason, should have been suffered to exist to the present time can only be accounted for on the ground of the general and singular ignorance which has prevailed as to the true nature and character of money.
There is an intrinsic and obvious difference between borrowers, which not only justifies but absolutely demands, on the part of a prudent man disposed to relieve the wants of applicants, a very different rate of interest. Two persons can hardly present them selves in precisely equal circumstances to solicit a loan. One man is cautious; another is rash. One is a close calculator, sober in his views, and unexcitable in his temperament; another is visionary and enthusiastic. One has tangible security to offer; another nothing but airy one of a promise. Who shall say that to lend money to these several persons is worth in each case an equal premium?
Conclusion
Usury laws are some of the most arbitrary, unjust, and unnecessary laws in existence. Maximum interest rates are set by politicians in legislatures based on nothing but their whims and imaginations. What is “usurious” in one state is perfectly fine in another state. Rather than taking advantage of vulnerable populations, loans at “usurious” interest rates help them obtain money that they would otherwise not be able to obtain. Government attempts to prevent excessive, unreasonable, or usurious levels of interest shut riskier borrowers out of credit markets and increase the incidence of fraud, theft, and resorting to loan sharking. How can usury be a crime when it is a transaction by mutual consent of lender and borrower?
If usury laws are arbitrary, unjust, and unnecessary, what, then, should be done? On the federal level, the Consumer Financial Protection Bureau should be eliminated. It is neither authorized by the Constitution nor a feature of the proper role of government. The federal government should not be regulating payday lenders or any other type of lender. On the state level, all laws that differentiate between interest and usury or set a maximum interest rate should be repealed. Payday lenders shouldn’t be regulated any more than any other business should be regulated, which is to say, not at all.
This article was originally published in the June 2023 edition of Future of Freedom.