A Basic Primer on Usury Law in Texas

Usury Definitions

“‘Usurious interest’ means interest that exceeds the applicable maximum amount allowed by law.” Tex. Fin. Code Ann. § 301.002(a)(17). “‘Interest’ means compensation for the use, forbearance, or detention of money. The term does not include time price differential, regardless of how it is denominated. The term does not include compensation or other amounts that are determined or stated by this code or other applicable law not to constitute interest or that are permitted to be contracted for, charged, or received in addition to interest in connection with an extension of credit.” Id. at (a)(4). “‘Time price differential’ means an amount, however denominated or expressed, that is: (A) added to the price at which a seller offers to sell services or property to a purchaser for cash payable at the time of sale; and (B) paid or payable to the seller by the purchaser for the privilege of paying the offered sales price after the time of sale.” Id. at (a)(16). A contract is usurious when there is any contingency by which the lender may get more than the lawful rate of interest. Butler v. Holt Mach. Co., 741 S.W.2d 169, 176 (Tex. App.—San Antonio 1987), opinion corrected on denial of reh’g, 739 S.W.2d 958 (Tex. App.—San Antonio 1987, no writ).

Usury Rates

The usury rate in Texas is ten (10) percent a year except as otherwise provided by law. Tex. Fin. Code Ann. § 302.001. The ten percent default usury rate means virtually nothing given that rate ceilings of Subchapter A of Chapter 303 of the Texas Finance Code create an exception to the usury rate rule that, more or less, swallows the rule whole. “Except as provided by Subchapter B [mostly related to credit cards], a person may contract for, charge, or receive a rate or amount that does not exceed the applicable interest rate ceiling provided by this chapter.” Tex. Fin. Code Ann. § 303.001. “The parties to a written agreement may agree to an interest rate . . . that does not exceed the applicable weekly ceiling.” Tex. Fin. Code Ann. § 303.002. So, basically, most loans can charge the weekly ceiling, which is generally going to be substantially higher than the ten (10) percent default usury rate, rendering the default rate rarely applicable.

Where Do I Look to See What Rates I Can Charge?

The weekly rate can be found in the Texas Credit Letter, which is published weekly by the Texas Office of Consumer Credit Commissioner located at 2601 N. Lamar Blvd., Austin, Texas 78705-4207. In the April 16, 2019 Texas Credit Letter, the weekly rate ceiling was 18.00%. The Texas Credit Letter can be found online: https://occc.texas.gov/publications/interest-rates

Spreading Doctrine

“To determine whether a loan secured in any part by an interest in real property, including a lien, mortgage, or security interest, is usurious, the interest rate is computed by amortizing or spreading, using the actuarial method during the stated term of the loan, all interest at any time contracted for, charged, or received in connection with the loan.” Tex. Fin. Code Ann. § 302.101.

What constitutes “interest”?

“The court of civil appeals has improperly stressed the labels placed upon the charges by the savings and loan association as being controlling of their real nature. It has often been said that courts will look beyond the form of the transaction to its substance in determining the existence or nonexistence of usury. See, Schmid v. City Nat. Bank of Wichita Falls, 132 Tex. 115, 114 S.W.2d 854 (1938). Such a rule is to be fairly applied to both borrowers and lenders alike. Labels put on particular charges are not controlling. A charge which is in fact compensation for the use, forbearance or detention of money is, by definition, interest regardless of the label placed upon it by the lender. Art. 5069—1.01(a). On the other hand, a fee which commits the lender to make a loan at some future date does not fall within this definition. Instead, such a fee merely purchases an option which permits the borrower to enter into the loan in the future. See, e.g., Financial Federal Savings & Loan Association v. Burleigh House, Inc., 305 So.2d 59 (Fla.Dist.Ct.App.1974); D & M Development Co. v. Sherwood & Roberts, Inc., 93 Idaho 200, 457 P.2d 439 (1969); Prather, Mortgage Loans and the Usury Laws, 16 Bus.Law. 181, 188 (1960). It entitles the borrower to a distinctly separate and additional consideration apart from the lending of money. Therefore, the lender may charge extra for this consideration without violating the usury laws. Greever v. Persky, 140 Tex. 64, 165 S.W.2d 709 (1942).” Gonzales County Sav. & Loan Ass’n v. Freeman, 534 S.W.2d 903, 906 (Tex. 1976). “Whether a charge is really interest or not is generally a question for the jury. “Where there is a dispute in the evidence as to whether the charge is merely a device to conceal usury, a question of fact is raised for the jury.” Id. “[I]t has been held that a lender may not charge 11 percent for the first five years and nine percent for the second five years and claim that the total loan is at the legal rate of 10 percent.” Riverdrive Mall, Inc. v. Larwin Mortg. Inv’rs, 515 S.W.2d 5, 9 (Tex. Civ. App.—San Antonio 1974, writ ref’d n.r.e.) (emphasis added).

When Does a Usury Savings Clause Protect the Lender?

Texas law generally allows lenders to avoid liability through usury savings clauses, but only within reason. You cannot just contract for thirty percent interest and then skirt the usury violation with a savings clause. There has to be some kind of avenue for charging non-usurious interest on the contract or interpreting the contract in such a way as to avoid usury.

“A savings clause is ineffective, however, only if it is directly contrary to the explicit terms of the contract . . . . As a simple example, a creditor may not specifically contract for a 30% interest rate and then avoid the imposition of usury penalties by relying on a savings clause that declares an intention not to collect usurious interest . . . .” First State Bank v. Dorst, 843 S.W.2d 790, 793 (Tex. App.—Austin 1992, writ denied). A savings clause can “supplement and explain” the “intent of the parties.” Id. The Texas Supreme Court has indicated that a usury savings clause may cure certain contingency provisions that may or may not result in a charge of usurious interest. Nevels v. Harris, 129 Tex. 190, 198, 102 S.W.2d 1046, 1050 (1937); Smart v. Tower Land & Inv. Co., 597 S.W.2d 333, 341 (Tex. 1980).

In a complicated usury dispute, ties go to the lender. “The usury statutes are penal in nature and, accordingly, must be strictly construed in such a way as to give the lender the benefit of the doubt.” Counsel Fin. Services, L.L.C. v. Leibowitz, 13-12-00103-CV, 2013 WL 3895331, at *4 (Tex. App.—Corpus Christi July 25, 2013, pet. denied).

Copyright, Ian Ghrist, 2019, All Rights Reserved. Unauthorized reproduction strictly prohibited.

Disclaimer: This document is for informational purposes only. Do not rely on any part of this document as legal advice. Instead, seek out the advice of a licensed attorney with regard to the particular facts and circumstances of your legal matter. Also, this information may be out-of-date or wrong and is not intended to be comprehensive or to address any potential or specific factual or legal scenario.