What is the Church's traditional understanding of usury and has it changed?

The short answer is that the understanding of usury has not changed to make usurious loans no longer intrinsically evil, nor has the Church changed her stance on the morality of usury. Taking usury is still a damnable sin.

First, we need to look at what usury is. There is a great article that outlines the understanding of usury that the Church has had since at least the middle ages, and is basically required reading for anyone interested in understanding the Christian stance on usury. I will cover an historical outline myself, and then explain the proper distinctions between kinds of loans, and lastly answer objections to the claim that usury remains sinful today.

First, let us look at what Aquinas says.

ST II-II Q78

To take usury for money lent is unjust in itself, because this is to sell what does not exist, and this evidently leads to inequality which is contrary to justice. In order to make this evident, we must observe that there are certain things the use of which consists in their consumption: thus we consume wine when we use it for drink and we consume wheat when we use it for food. Wherefore in such like things the use of the thing must not be reckoned apart from the thing itself, and whoever is granted the use of the thing, is granted the thing itself and for this reason, to lend things of this kin is to transfer the ownership. Accordingly if a man wanted to sell wine separately from the use of the wine, he would be selling the same thing twice, or he would be selling what does not exist, wherefore he would evidently commit a sin of injustice. On like manner he commits an injustice who lends wine or wheat, and asks for double payment, viz. one, the return of the thing in equal measure, the other, the price of the use, which is called usury.

On the other hand, there are things the use of which does not consist in their consumption: thus to use a house is to dwell in it, not to destroy it. Wherefore in such things both may be granted: for instance, one man may hand over to another the ownership of his house while reserving to himself the use of it for a time, or vice versa, he may grant the use of the house, while retaining the ownership. For this reason a man may lawfully make a charge for the use of his house, and, besides this, revendicate the house from the person to whom he has granted its use, as happens in renting and letting a house.

Now money, according to the Philosopher (Ethic. v, 5; Polit. i, 3) was invented chiefly for the purpose of exchange: and consequently the proper and principal use of money is its consumption or alienation whereby it is sunk in exchange. Hence it is by its very nature unlawful to take payment for the use of money lent, which payment is known as usury: and just as a man is bound to restore other ill-gotten goods, so is he bound to restore the money which he has taken in usury.

In Aquinas' estimation, there are two kinds of goods: goods for consumption and reusable goods. Food is an example of a consumable good. Once used for its purpose, it cannot be used a second time for its purpose. A lawn mower would be an example of a reusable good. It can be used again and again to accomplish its given purpose. It would be unreasonable, then, to charge someone for food, and also for eating that food. It would, however, be just to charge someone for using your lawnmower, and also expect them to return your lawnmower once they have used it.

Aquinas then shows that money is a consumable, and not a reusable, good. Hence, the conclusion here is that a lender of money can only expect back the money lent, and not additional money on top of that. To require an additional payment is unjust.

The papal encyclical Vix Pervenit developed the doctrine on usury, and made distinctions between loans that have extrinsic titles involved in them and those which did not. These extrinsic titles referred to other assets that were tied up in the loan contract. For instance, a home loan involves a physical, reusable good: the house. To take interest on this loan, as a sort of rent for using the good purchased with the original money, is not usurious. The lender essentially owns a portion of the house (it was purchased with his money) and is owed compensation for its use. The borrower is paying for this use and purchasing a little more of the house from the lender with each payment.

In the modern economic parlance, there are two kinds of home loans: full-recourse and non-recourse. Non-recourse loans do not permit the lender to go after the borrower for the principle. If the borrower cannot repay, they will only lose the house. If the lender is not able to recoup all of their losses by selling the house, then they lose money. Under a full-recourse loan, the lender who loses money on the sale of a repossessed house can also require the borrower to repay him that difference. So, under full-recourse, if I lend you $100,000 to buy a house, and you default still owning me $90,000, and I am only able to find someone willing to buy the house for $80,000, you still owe me $10,000

The injustice of full recourse loans, which are usurious, should be evident from this example. The borrower is now homeless and still owes $10,000 on top of his homelessness. This sort of situation applies generally to all kinds of usurious loans: the loan is one where the borrower is personally on the hook for the full principle, rather than the principle being secured by an asset, and the contract terminating with the exchange of assets. Generally, these could be called secured and unsecured personal loans.

A loan that is not personal (eg a loan to a corporation, like purchasing a stock) can never be usurious, though it could possibly be unjust on other grounds. If the loan is not personal, it is by definition secured, since it is an asset (like a business or organization) that is on the hook for the principle, rather than an identifiable human individual.

Also included in extrinsic titles is interest charged to cover operating costs. If a large charity needs to pay someone a salary to track their lending and repayments, for instance, a small sum can be charged to the borrowers to pay that person's salary. However, the organization cannot make a profit from the interest charged in this way. The interest charged and expenses of the operating costs must be 1:1, or the organization must lose money on the loan. it cannot profit without those in charge becoming usurers and thus sinning.

From this, we can derive the proper definition of usury: Usury is a for-profit unsecured personal loan. Anything else, while it may be unjust on other grounds, is not usury.

Objection: The Church has said that confessors should not withhold absolution from someone suspected of usury

The "required reading" article addresses this in Question 29:

prior to a declaration by the Holy Office ending the practice on August 31, 1831, it was frequently imposed that a usurer had to make an accounting of all the money he had made through usury and make restitution before he was given sacramental absolution. This is completely disanalogous to the situation of a divorced and ‘remarried’ person who is objectively committing adultery on an ongoing basis. The former may be totally repentant and fully committed to sinning no more without having the practical means to do the accounting and make restitution. The latter by definition is not committed to sinning no more. Material restitution for past wrongs, in short, is an entirely different pastoral subject from the basic sacramental requirement for a firm purpose of amendment.

It was also the case that usury was frequently misunderstood, and many contracts which were not usury were condemned as such by overzealous but financially ignorant people. An analogous case in the context of the sexual revolution would be the ‘rigorists’ who condemn NFP as a form of contraception, and their ‘laxist’ counterparts who make the same claim but conclude from it that therefore contraception is morally licit. Aquinas and the Popes who addressed the issue in bulls and encyclicals may have understood the difference between non recourse (societas) investment and full recourse (mutuum) loans, but many priests at the parish level did not. The spectacle of a penitent, innocent of usury, hounded and denied absolution by an overzealous confessor who doesn’t properly understand the subject, may be a risible fiction now; but that was not always the case.

Essentially, the requirements for usurers to repent were too burdensome, and highly disproportionate to other mortal sins. Furthermore, many people do not properly understand the distinctions between secured and unsecured loans, and personal and non-personal loans, including confessors who may unjustly an unwittingly withhold absolution (of other sins) from someone innocent of usury.

Objection: The fifth Lateran council said that the Franciscans lending money and charging interest are not guilty of usury

That same document makes clear that the interest charged is due to extrinsic titles, ie operating costs, and that, because of this, the Franciscans charging interest in this instance "are in no way guilty of usury."

Objection: Our understanding of money has changed. The time-value of money means that charging interest for money lent is actually charging the use of something, namely, the value of the time involved

The so-called time-value of money is a fictitious innovation. It is predicated on two falsehoods. First, it is predicated on the idea that an unrealized potential is a "real good." It is not. Unrealized potentials are just that: unrealized. They may never come to be, and there is certainly nothing about them which requires that they be brought about.

Second, it is predicated on a false assumption that the value of monetary assets will always increase. If I invest my money in the stock market over the course of 10 years, I'm guaranteed a positive return. That's the thought process. While this appears to be true by induction, one who claims that this will continue to be true into the future is making a mostly unfounded speculation. There is no reason why the stock market, or other markets, cannot crash substantially for a prolonged period of time. The Great Depression illustrates this fact.

Because the time-value of money is not real, charging for it is still in violation of Aquinas' formulation of usury: charging for something "which does not exist."