Academic journal article
By Berger, Shimon A.
Fordham Urban Law Journal , Vol. 29, No. 6
For centuries, usury laws protected needy and desperate debtors from lenders' outrageous demands. (1) The protection of the needy and desperate, of the uninformed and unsuspecting, has been the upstanding principle behind these laws. (2) Usury laws are one of the earliest forms of consumer protection law, (3) having been in place over a millennia and within a wide variety of cultures in order to protect "the needy from the greedy." (4) This ideal was seemingly not in dispute in 1787 when Jeremy Bentham posed the classic freedom of contract objection to usury regulation. (5) While he postulated that, "no person of `sound mind' who is `acting freely' should be hindered from striking a loan bargain on terms she finds acceptable," (6) usury proponents disagreed, claiming that Bentham's ideal contradicts the moral policies that require usury regulation. (7) They have decried Bentham's depiction of loan bargaining as "rosy-eyed and idealistic." (8) To add to the debate, outrageous episodes of lender abuse in the 1990s have bolstered a strong consumer protection movement. (9) Some initiatives have focused on the inadequacies of current systems in regulating certain lending activities, (10) such as the new loan sharks who operate "auto-title pawns" (or "title loans"), (11) and "payday lenders." (12) Others have focused on modern predatory lending practices, which threaten desperate and needy borrowers. (13)
What has since emerged from the usury debate amounts to a distinction between borrowing by unsophisticated or desperate parties, and borrowing in a commercial context, which presumes a level of sophistication and equal footing. (14) Usury regulations in most states "treat corporate or business borrowers differently than consumer borrowers." (15) This manifests itself in allowing higher interest rate ceilings for corporate borrowers, exempting corporate loans from usury limits altogether, and even extending the "corporate exemption" to business loans generally. (16) Yet, even in a commercial context, small businesses may have less familiarity with commercial transactions and might suffer as much as unsophisticated consumer borrowers. (17) On the other hand, usury opponents, realizing the consumer justifications for strong usury regimes, argue that legislators should resist reaching for the blunt instrument of usury to restore contractual order in the marketplace, (18) arguing for a cost justification standard of unconscionability. (19)
However, most of the usury debate today focuses on the usury laws themselves. Should interest limits be adopted, or should states turn to the unconscionability standard as their model to combat predatory lending? (20) There are also advocates and consumer protection groups that promote new legislation addressing loop-holes that allow "fringe banking predatory lending" (21) to flourish. (22) The current debate, however, has not adequately focused on the various usury remedies and their impact on equitable policy concerns. Usury remedies are notoriously nonuniform, (23) but usury penalties have historically been more severe than they are now. (24) The most common remedy for usury violations is the disallowance of the entire interest charged. (25) A few states void only the interest that exceeds the usury limit, (26) but most usury regimes levy some additional sanction, such as the forfeiture of all the interest, as a deterrent. (27) However, some states still impose severe punitive civil sanctions, denying the recovery of not only the interest but the loan principal as well. (28) Additionally, only a few states provide for criminal penalties for usury violations. (29) How these various approaches to usury remedies impact the general usury debate has not been adequately explored.
This Note evaluates New York's usury remedy regime, which is among the most severe in the country. This Note focuses exclusively on the ramifications of New York's severe usury remedy regime, and how it leads to inequitable results which are contrary to the underlying purpose of the usury laws. …