Usury Law, Payday Loans, and Statutory Sleight of Hand: Salience Distortion in American Credit Pricing Limits

In the Western intellectual tradition usury law has historically been the foremost bulwark shielding consumers from harsh credit practices. In the past, the United States commitment to usury law has been deep and consistent. However, the recent rapid growth of the “payday” loan industry belies this longstanding American tradition. In order to understand the evolution of American usury law, this Article presents a systematic empirical analysis of all fifty state usury laws in two time periods: 1965 and the present. The highest permissible price of a typical payday loan authorized under each state’s usury law was calculated. These prices were then translated into annual percentage rate format following the federal Truth-in-Lending Act price disclosure regulations. Moreover, this Article compares how each state legislature describes its most expensive permissible payday loan, with how that loan is characterized under federal price disclosure law. This Article does so by suggesting a new theoretical concept labeled “salience distortion.” This analysis produces three findings: (1) usury law has become more lax; (2) usury law has become more polarized; and (3) usury law has become more misleading. These findings suggest that the numeric language in current state usury statutes is not chosen because it helpfully describes some expectations of commercial behavior. Rather, legislatures have chosen the language of most current credit price caps because it sounds in an ancient moral tradition—a mythology of sorts—that roughly delineates popular perception of moral and immoral interest rates. Exploiting this normative tradition as well as common behavioral economic heuristics, many state legislatures use small, innocuous numbers in usury law because they are attempting to minimize the public and media outcry over their decision to legalize triple-digit-interest-rate consumer loans. In addition, going beyond consumer protection law, the concept of salience distortion offers a promising new theoretical tool in behavioral economic analysis of legislation.