Usury Laws: Do They Apply To Business Loans?

Usury laws are in place to protect consumers from predatory lending and high-interest rates. They govern the interest charged on a loan, setting a limit on how much interest can be charged. In the United States, individual states are responsible for setting these laws, and they vary from state to state. While usury laws do not typically apply to most credit cards or banks, they do apply to non-bank lending companies. So, do they apply to business loans? This depends on the state and the type of business loan. For example, in Washington State, if a loan is made primarily for a commercial, agricultural, investment, or business purpose, the borrower may not claim a defense of usury against the lender. However, in Connecticut, commercial loans of $10,000 or less are subject to the state's general 12% usury limit.

Usury laws and their exemptions

Usury laws, enforced by individual US states, protect consumers by capping the interest rate that can be charged on a loan. While these laws vary from state to state, they generally do not apply to business loans. Here is a detailed overview of usury laws and their exemptions.

Usury Laws

Usury is the practice of lending money at an interest rate that is unreasonably high or above the legal limit. Usury laws set a maximum interest rate that can be charged on loans, protecting consumers from predatory lending practices. These laws are enforced by individual US states rather than at the federal level, with each state setting its own interest rate limitations. For example, Pennsylvania considers interest above 25% as criminal usury, while New Jersey's general usury limit is 30% for individuals and 50% for corporations.

Exemptions to Usury Laws

There are several exemptions to usury laws, which vary by state. Here are some common exemptions:

• Business Loans: In most states, usury laws do not apply to commercial, agricultural, investment, or business loans. This means that borrowers cannot claim a defence of usury against the lender, and interest rates on these loans may exceed the state's usury law.
• Credit Card and Retail Installment Debts: Credit card companies and retail installment transactions, such as retail charge agreements and credit card debts, often exceed state usury laws. This is because they are subject to different regulations and are not bound by the same interest rate limitations.
• Nationally Chartered Banks: Nationally chartered banks can apply the highest interest rates allowed by the state in which they are incorporated, regardless of the borrower's location.
• Licensed Lenders: Many licensed lending institutions, such as banks, credit unions, and licensed pawnbrokers, are exempt from usury laws and can charge higher interest rates.
• Real Estate Broker-Arranged Loans: Loans made or arranged by licensed real estate brokers, which are secured by a lien on real property, are often exempt from usury laws.
• High-Value Loans: Loans with a total principal amount of at least a certain threshold, such as $300,000, are sometimes exempt from usury laws.
• Loans to High-Net-Worth Individuals: Loans made to borrowers with total assets of at least a certain amount, such as $2 million, may be exempt from usury laws.
• Trustee Loans: Loans made by specified institutions authorised to act as trustees in a fiduciary capacity may be exempt.

It is important to note that even if a loan is exempt from usury laws, there may still be caps on the interest rates that can be charged. These caps vary depending on the type of loan and the lender. Additionally, usury laws only apply to loan or forbearance transactions and are not applicable if the transaction is not considered a loan.

State-specific usury laws

Usury laws, which vary from state to state, are designed to regulate the maximum interest rates that lenders can charge borrowers. These laws aim to protect consumers from predatory lending practices and financial hardship. While usury laws are enforced by individual states rather than at a federal level, federal laws like the Truth in Lending Act also impact regulations to ensure borrower protection and maintain lending integrity.

California

California's general usury limit for non-consumers is more than 5% greater than the Federal Reserve interest rate. The maximum rate to consumers is 10% per annum.

District of Columbia

The general usury limit in the District of Columbia is anything greater than 24%. On loans above $500,000, the maximum rate is 25%. On loans below $3,000, the usury limit is 16%. The usury limit for consumer transactions is 12%.

New Jersey

New Jersey's general usury limit is 30% for individuals and 50% for corporations.

Pennsylvania

Pennsylvania considers interest above 25% as criminal usury.

Tennessee

Tennessee's general usury limit is the lesser of 24% or four points above the average prime loan rate. On retail installment contracts, the maximum rate is 18% on the first $500 and 15% for the portion above that.

Washington

Washington's general usury law does not apply to loans made primarily for a commercial, agricultural, investment, or business purpose. The state's usury limit is either 12% or four points above the average T-Bill rate for the previous week.

Usury savings clauses

The clauses typically recharacterise interest payments made by a borrower that exceed the permissible rate set by state law as principal payments. This effectively reduces the interest rate to the maximum allowed and applies any excess interest paid to the reduction of the principal loan amount.

The enforceability of usury savings clauses depends on the laws and public policy of the specific state. For example, in California and Florida, these clauses serve as evidence in determining whether there was an intent to violate usury laws, but only when the effective interest rate cannot be determined from the credit agreement. In contrast, states like Arkansas, North Carolina, and New Jersey consider only whether the interest received exceeds the maximum permitted amount, regardless of intent.

It is important to note that not all states enforce usury savings clauses. For instance, the Rhode Island Supreme Court found that these clauses violate state public policy and refused to enforce them, placing the burden of ensuring compliance with usury laws on lenders.

When relying on a usury savings clause, lenders should be aware of the laws in the specific states where they operate and pay attention to any fees paid by the borrower, as certain fees may be considered part of the interest paid on the loan. Violating usury statutes can result in penalties such as forfeiture of principal and/or interest, treble damages, and even criminal penalties.

Usury law penalties

Usury laws, which are enforced by individual states in the US, govern the interest charged on a loan, protecting consumers from predatory lending and high-interest rates. While there is a lot of variation in usury laws from state to state, and different rules apply to commercial and private lenders, the general rule is that lenders can safely charge interest of up to 10% per year without violating these laws.

In the state of Texas, for example, a creditor may contract, charge, and receive interest or a time price differential, but the maximum rate is 10% per year unless otherwise provided by law. Any contract for a greater rate of interest is contrary to public policy and subject to the appropriate penalty prescribed by law.

In Nebraska, if a greater rate of interest than is allowed by law is contracted for, received, or reserved, the contract is not void. However, if it is proven that illegal interest has been contracted for, taken, or reserved, the plaintiff can only recover the principal without interest, and the defendant recovers costs. If interest has been paid, the judgment will be for the principal, deducting the interest paid.

According to US code, if a rate of interest greater than is allowed by law is taken, received, reserved, or charged, this is deemed a forfeiture of all interest. If the greater rate of interest has been paid, the person who made the payment or their legal representative may recover twice the amount of the interest paid from the association that took or received it, as long as the action is commenced within two years of the usurious transaction.

Usury laws and state economies

On the one hand, usury laws can attract credit card companies and banks to a state, boosting economic growth and creating jobs. For example, in 1980, South Dakota's economy was struggling, and Citibank was facing losses in its credit card business. South Dakota eliminated its usury laws, which led Citibank to relocate its credit card division to the state, creating 3,000 new jobs. This move incentivized other credit card companies to follow suit.

However, the elimination of usury laws also has drawbacks. The availability of consumer credit, often referred to as the "democratization of credit," has led to an increase in bankruptcy filings and high consumer debt levels. With no interest rate caps, consumers are willing to pay excessive interest rates on credit cards, even after inflation subsides. This has resulted in many Americans being deprived of their ability to acquire and protect financial assets.

The impact of usury laws on state economies is further complicated by the fact that they do not apply to most credit cards and banks, especially if they are headquartered in states without defined maximum interest rate limits. This has led to a competitive response from some states, which offer lower rates to their customers to remain attractive.

Additionally, usury laws vary from state to state, with some states imposing different rates on judgments, written loan agreements, mortgages, business loans, and educational loans. The variation in usury laws means that lenders must be vigilant in complying with the relevant state laws to avoid severe penalties, including the invalidation of loan contracts and the recovery of double or triple the usurious interest paid.

In conclusion, while usury laws can provide a short-term boost to state economies by attracting financial institutions, the long-term impact can be detrimental to consumers, with high interest rates contributing to increased debt and bankruptcy filings. The debate around usury laws and their impact on state economies is likely to continue, with consumer protection at the heart of the discussion.

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