Usury is generally defined as the charging, taking, or receiving of interest at a rate greater than that permitted by law.
The three essential elements of usury are:
- A loan or forbearance of money.
- An agreement for a return of the money in all events.
- An agreement to pay more than the legal rate of interest for its use.
Most states have laws, either constitutional or statutory, that determine the maximum rate of interest that may be charged. These laws provide for different methods of determining whether a loan is usurious, contain different rates of interest which cause a loan to be usurious, and provide for different penalties.
Also, the Uniform Consumer Credit Code, as adopted in many states, provides for determining the rate of interest which may be charged for a real estate loan.
Effect Of Usury
It is necessary to examine the constitutional or statutory provisions in each jurisdiction for the purpose of determining the effect of usury on a particular transaction.
The penalties that may be imposed on a lender for charging usurious interest vary widely.
The most common penalties may be:
- The usurious transaction is declared void and the lender faces the loss of principal as well as interest.
- The forfeiture of all the interest paid by the borrower.
- The forfeiture of all the interest paid by the borrower in excess of the legal note.
- The possible criminal prosecution of the lender.
- Assessment of other penalties.
- Impairment of the lien of the mortgage securing a usurious loan.
Exemption From The Usury Laws
It is important to be familiar with the usury laws in order to determine their applicability to a particular situation.
The most common types of exemptions found in of the various states are the following:
- Corporations being allowed to contract for interest rates higher than the
statutory maximum, provided that the amount of the loan meets certain minimum
- Partnerships, limited partnerships, and business trusts being exempted.
- Loans for "business or commercial purposes" being exempted, in some cases only if certain minimum requirements are present.
- Special provisions for government loans.
- Provisions determining loan minimums subject to usury laws, and loans above those minimums being exempt.
Determination That The Transaction Is Usurious
Generally, the facts which establish whether a transaction has violated the state usury laws are not easily ascertainable from the title insurance underwriter position. Many times, it might be totally impossible.
"Interest" may include charges for the use of money even though labeled otherwise, e.g.:
- Fees and charges
- Commitment fees
- Prepayment premiums and late charges
- Escrows and other retained moneys
- Using a 360-day year
- Waiver of rights under mortgages
- Fees in connection with the extension of material obligations.
Attempts to circumvent usury laws include:
- Disguise of interest as preliminary charges.
- Sales with option to purchase.
- Transacting business in one state to avoid the usury laws of another state.
Usury As An Exception From Title Coverage
The possibility of the validity or enforceability of the lien of the insured mortgage as a result by the usurious condition of the loan, is excluded from the ALTA 1970, 1987, 1990 and 1992 Loan Policies, the ALTA 1975 Construction Loan Policy and the ALTA 1975 Leasehold Loan Policy.
States Where Not Permitted
Some states do not authorize usury coverage for loan policies of title insurance on the basis that said insurance is contrary to public policy of the state. It is argued that said insurance would allow a lender, which is engaged in conduct which is subject to a statutory penalty, to insulate itself against that penalty through the purchase of insurance.
No usury coverage should be offered in relation to a loan that affects land located in a state where such coverage is not permitted.
States Where Permitted
In these states usury coverage may be offered if based on legal exceptions. In states where there is not prohibition relative to insuring against usury in loan policies of title insurance, the Company may be willing to offer usury coverage based on:
- A determination, which is the product of a complete review and analysis
of the usury laws (constitutional, statutory and cases) of the state where
the land affected by the loan is located, that, in a certain type of loan
transaction, the "borrower," or the "lender," or the "transaction"
itself is considered "Exempt" from the effect of the usury laws.
- A Determination that the transaction to be insured is one defined as "Exempt"
by the state usury laws.
- The fact that the exclusive basis for the usury coverage to be offered is the "Exempt-From-Usury" status of the proposed transaction.
States Where Permitted
Usury coverage cannot be offered if based upon the authorized legal rate of interest. The Company is unwilling to offer any type of usury coverage the basis of which is the "compliance" of the loan transaction with the usury laws of the state.
In some cases, an attorneys opinion as to usury may be required for usury coverage.
Forms Of Usury Coverage
On the basis that the loan transaction is "Exempt" from the state usury laws, and that prior approval has been obtained from a Senior Underwriter, a proper endorsement, insuring against usury, may be issued.
Contact a Senior Underwriter for the appropriate endorsement and to discuss the requirements for usury coverage.