Constitution of Arkansas - Usury Law

Usury Law

Section 13 originally set the state's usury limit at 10%; it was amended in the early 1980s to 5% above the Federal Reserve Discount Rate on 90-day commercial paper (see the latest rates), but falling interest rates and poorly worded provisions made the amended version even more onerous than the original. For example, a clause in the 1980s amendment appears to set a 17% limit for consumer loans; but since they weren't exempted from the main "5% above discount rate" provision, the courts ruled that the limit for consumer loans was the lesser of the two clauses, usually the 5% rule. Also, other language in the amendment applying the usury limit "at the time of the contract" made floating-rate loans extremely difficult, even though the usury limit itself was a floating rate. Even worse, neither the original nor amended provisions allowed the legislature to make any exceptions to the general usury law, as happened in other states. The Arkansas legislature tried to permit payday loans anyway, but after two adverse decisions in 2008 the Attorney General ordered all payday lenders in the state to shut down.

Eventually, after out-of-state banks took over most lending in Arkansas thanks to the Marquette decision and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Arkansas banks received special relief from the usury law through Section 731 of the Federal Gramm-Leach-Bliley Act in 1999. Also in that year, an Arkansas Supreme Court decision allowed out-of-state auto finance companies to engage in subprime lending through Arkansas dealerships without violating the usury law. Today, only a handful of loans made to Arkansans are still subject to this law, mainly private-party lending and some prime auto loans from companies like GMAC and Ford Credit.