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@142 CHAP 11
┌───────────────────────────────────────────────┐
│LENDING MONEY: TRUTH-IN-LENDING AND USURY LAWS│
└───────────────────────────────────────────────┘
"If you see a banker jump out a window, jump
after him. There is sure to be profit in it."
-- Voltaire
That may have been excellent advice in 18th Century France, on how to
succeed in business. With today's bankers, however, follow that advice
and you will most likely end up with two broken ankles and a full-body
cast, if you're lucky -- or a closed-casket funeral if you're not.
In any event, if your business activities involve lending money, or if
you sell to consumers on credit terms, you may have to comply with the
federal Truth-in Lending Act and state laws that prohibit the charging
of "usurious" interest rates on loans or other credit transactions.
Note that we are referring here to extending credit where you charge
interest or other finance charges, not the more common situation where,
in a typical service business, you perform a service for a customer or
client, send them a bill, and then wait for a month or two to get paid.
While that is also a form of "consumer credit," it is not the kind that
is generally regulated by the following laws.
TRUTH-IN-LENDING REQUIREMENTS. If you regularly lend money, or if you
sell goods or services to consumers on credit and either impose a fin-
ance charge or provide in a written agreement for them to make payment
in four or more installments, you will generally be subject to the
Truth-in-Lending disclosure requirements. Regulations under the Truth-
in-Lending Simplification and Reform Act (Sounds like a tax law, does
it not?) provide that a business is not subject to the Truth-in-Lending
rules unless it extended consumer credit more than 25 times in either
the previous year or the current calendar year. For loan transactions,
required disclosures include the following (all of which are prescribed
with a degree of specificity akin to that of a medical text on how to
do brain surgery):
. The annual percentage rate of interest;
. When the finance charge begins to accrue;
. The total amount of the finance charge;
. The number of payments to be made and the dollar amount of each
payment;
. When payments are to be made;
. The total dollar amount of all payments;
. How any prepayment penalty and any late charges are to be
computed;
. The amount of any prepaid finance charges and any deposit, plus
the sum of the two;
. The amount financed;
. The existence of any balloon payment and the dollar amount of it;
. Annual statements of billing rights;
. Other information regarding security interests and rights to
rescind;
. Periodic billings to credit customers must include a number of
disclosures regarding outstanding balances, how finance charges
have been computed, and other items.
The rules regarding Truth-in-Lending are far too complex to cover
satisfactorily in this program (even if we were smart enough to be able
to fully explain them), other than to alert you to the possibility that
you may be required to comply with those rules, and to give you some
sense of what will be required if you are. If you plan to extend
credit to consumers (other than sending out bills requesting payment in
full, without interest charge, after you have provided goods or
services), you will need to consult an attorney experienced in this
area of the law, which is exceedingly technical.
Fortunately, recent legislation has somewhat simplified the Truth-in-
Lending rules, and the Federal Reserve Board has published model dis-
closure statements and billing rights statements that can be used to
satisfy the requirements of the Truth-in-Lending regulations.
However, even the new model disclosure forms are mainly an aid to
lawyers, and not to civilians.
One other fairly recent development you need to be aware of is the
Cash Discount Act (Public Law 97-25), which now permits sellers to
offer a discount of any amount to customers who pay in cash or by
check without running afoul of the Truth-in-Lending rules, if the dis-
count is clearly disclosed and made available to all customers. In
the past, if you offered more than a 5% cash discount, you were con-
sidered to be imposing a finance charge on credit customers, and had
to give them all the required Truth-in-Lending disclosures to avoid
possible legal sanctions. Happily, that is no longer required in the
case of mere cash discounts.
STATE USURY LAWS. Virtually every state has its own unique, and often
quite complex, set of usury laws, governing the amount of interest a
person may charge on various types of lending and credit transactions.
These laws vary too greatly in scope and application to make any valid
generalizations. What you need to know, if you are lending any money
or extending credit in connection with your business (or even person-
ally, in some states), is that you will need some advice from a good
business lawyer as to what rate of interest you may charge on various
categories of loans in @STATE.
@CODE: CA
The California Constitution prohibits individuals and businesses from
charging "usurious" interest on loans or other extensions of credit.
Unless there is a written agreement, any interest in excess of 7% per
annum is considered usurious. (Fortunately, there are numerous ex-
emptions and exceptions to this rule.)
To a lender, the usury law is important not only because of possible
criminal sanctions, but also because all of the interest on a usurious
loan, not just the interest in excess of the legal limitation, is for-
feited and unenforceable if the loan is found to be in violation of the
California usury law.
If there is a written agreement as to the interest rate, you may charge
up to 10% for loans or extensions of credit made for personal, family,
or household use. For loans not made for such uses, the maximum rate
that you can charge is normally the higher of (a) 10% per annum or
(b) five percentage points above the "discount rate" charged by the
Federal Reserve Bank of San Francisco as of the 25th day of the month
preceding the month in which the loan is made (or in which a contract
is signed to make the loan, if earlier).
Thus, since the Federal Reserve's discount rate in mid-1991 was 5.5%,
a loan could be made then (for other than personal, family or household
use) at a rate of 10.5% without violating the California usury law.
(The limit would be 10% now that the Discount Rate is below 5%.)
Loans or credit extended in connection with the purchase, construction,
or improvement of real property are not considered made for personal,
family, or household use, and would thus be subject to the 12% limit
at present. Some loans, such as those made or arranged by a licensed
real estate broker, are completely exempt from the usury law under the
constitution. The legislature has made it clear that any loan made by
a licensed real estate broker, either as a principal or an agent, is
exempt from the usury law whether or not the broker is acting within
the scope of that license.
The legislature, as authorized by the state constitution, has also en-
acted a wide range of other exemptions from the usury laws for various
types of lenders, such as banks, saving and loans, insurance companies,
commercial finance lenders, and consumer finance lenders. The commer-
cial finance lender exemption will exempt any loan of over $5,000 to a
business if the borrower is a corporation, partnership, or joint ven-
ture; if a substantial part of the security for the loan consists of
property used primarily for other than personal, family, or household
purposes; or if the borrower is self-employed and represents in writing
to the lender that a substantial portion of the loan will be used for
acquiring or carrying on a trade or business. Even loans of under
$5,000 are exempt if made by licensed commercial finance lenders.
Note that in addition to usury laws, California's Unruh Act amounts to
a state version of a truth-in-lending act, and applies in many situ-
ations where the federal Truth-in-Lending Act does not.
@CODE:EN
@CODE: HI
In Hawaii, the maximum legal rate of interest is set at 10% if there is
no express written contract. Otherwise, the maximum legal rate is gen-
erally 1% per month if there is a written agreement, with various ex-
emptions and exceptions to this limit.
A person who violates the Hawaii usury law forfeits any interest what-
soever on the contract and is subject to a fine and imprisonment, so
violating the usury law is not something to take lightly. Various ex-
emptions include loans made by certain financial institutions, first
mortgage loans, and purchase-money mortgages. There is no limit in
certain transactions that are not consumer credit, credit card, or
home business loan transactions. In addition, rates of up to 18% may
be allowed in certain credit card transactions.
@CODE:EN
@CODE: LS
In @STATE, lending money is prohibited. Furthermore, anything
that isn't prohibited by the State is MANDATORY.
@CODE:EN
Note that usury is a criminal offense under the laws of many states....
In many states, the usury law is important not only because of possible
criminal sanctions, but also because all of the interest on a usurious
loan, not just the interest in excess of the legal limitation, may be
forfeited and unenforceable if the loan is found to be in violation of
the state's usury law.
┌────────────────────────────────────────────────────────┐
│BOTTOM LINE: The usury law is an extremely tricky area.│
│You should consult a competent business attorney if you│
│have any reason to believe you might be running afoul of│
│this law in making any kind of loan or otherwise extend-│
│ing credit at interest. Usury laws tend to be very con-│
│voluted in their interpretation, particularly in decid-│
│ing WHICH state's usury law is to apply, in some cases. │
└────────────────────────────────────────────────────────┘