Business Heaven/Business Heaven.iso/accnting/sba93_4/f101.sbe

Text File | 1993-08-16 | 10KB | 230 lines

@142 CHAP 11

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        │LENDING MONEY:  TRUTH-IN-LENDING AND USURY LAWS│
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         "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, how-
ever, 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" inter-
est 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 sit-
uation 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 mon-
ey, 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 four or more install-
ments, 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 out-
      standing 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 pay-
ment 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 fairly recent development you need to be aware of
is the Cash Discount Act (Public Law 97-25), which now per-
mits 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 dis-
closed 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 custom-
ers, 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 dis-
counts.

STATE USURY LAWS.  Virtually every state has its own un-
ique, 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 general-
izations.  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 busi-
nesses 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 usuri-
ous.  (Fortunately, there are numerous exemptions and ex-
ceptions to this rule.)

To a lender, the usury law is important not only because of
possible criminal sanctions, but also because all of the in-
terest 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 per-
centage 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 1993 was
well under 5%, a loan could be made then (for other than
personal, family or household use) at a rate of 10% without
violating the California usury law.  (The limit would be
over 10% only if the Discount Rate were above 5%.)

Loans or credit extended in connection with the purchase,
construction, or improvement of real property are not con-
sidered 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 fin-
ance lender exemption will exempt any loan of over $5,000
to a business if the borrower is a corporation, partner-
ship, or joint venture; if a substantial part of the secur-
ity 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 in-
terest 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 for-
feited and unenforceable if the loan is found to be in vio-
lation 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. │
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