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Text File | 1996-11-06 | 10KB | 220 lines

@142 CHAP 11

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        │LENDING MONEY:  TRUTH-IN-LENDING AND USURY LAWS│
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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 finance charge or provide in a written
agreement for them to make payment in 4 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 disclosure 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 law 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 discount is clearly disclosed and made available to
all customers.  In the past, if you offered more than a 5%
cash discount, you were considered 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 personally, 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
exemptions 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 forfeited 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-1996
was 5.25%, a loan could be made then (for other than personal,
family or household use) at a rate of 10.25% without violating
the California usury law.  (The limit would be 10% only if the
Discount Rate were 5% or less.)

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 10% 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 state 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 enacted 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 commercial
finance lender exemption will exempt any loan of over $5,000
to a business if the borrower is a corporation, partnership,
or joint venture; 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 situations 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 generally 1% per month if there is a
written agreement, with various exemptions and exceptions
to this limit.

A person who violates the Hawaii usury law forfeits any
interest whatsoever on the contract and is subject to a fine
and imprisonment, so violating the usury law is not a thing
to be taken lightly.  Various exemptions 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 loan,  or otherwise extending any│
    │credit at interest.   State usury laws tend  to be quite│
    │convoluted in their  interpretation,  particularly  when│
    │deciding WHICH state's usury law is to be applied.      │
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