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.

Reimbursement of Your Attorney’s Fees When You Win Your Case

The so-called “American Rule” provides that, in most of the United States—Texas included, each side to a lawsuit, Plaintiff and Defendant, must pay its own attorney’s fees. While we inherited most of our legal system from the British common law, we do not generally follow the “English Rule,” which states that the losing side pays the other side’s attorney’s fees. In Texas, however, there are countless exceptions to the American Rule. For example, attorney’s fees are recoverable from the losing side in breach of contract cases, cases involving a declaratory judgment, Uniform Fraudulent Transfers Act claims, etcetera.

What the general public rarely understands is that reimbursement of your attorney’s fees when you win your case is hardly automatic. Attorneys will rarely (probably never) accept a breach of contract case for a plaintiff and simply bill the defendant for the legal work. The reason is that when the trial ends, together with all of the appeals (if a supersedeas bond has been posted), the winning party does not actually receive payment for the legal fees. Instead, the winning party receives a monetary judgment against the losing party for the attorney’s fees. That monetary judgment can then be enforced using all of the post-judgment collections procedures that are available under Texas law. This generally means recording an abstract of judgment in counties where the judgment debtor owns real estate and filing for a writ of execution against any non-exempt property owned by the judgment debtor, but there are other collections methods as well, like garnishment, receivership, or turnover proceedings. The amount of legal work that is necessary to collect on a monetary judgment can be quite substantial and no one wants to perform all of the legal work necessary to complete a trial, only to create more post-judgment legal work for themselves, unless the prospects for recovery are high. Also, the attorney’s fees incurred in performing the post-judgment collections activities are generally non-recoverable. So, you may get a judgment for your attorney’s fees, and still have to pay your attorney to go collect on that judgment.

To make things more complex, the winning side does not receive a judgment for attorney’s fees actually “incurred.” See Sloan v. Owners Ass’n of Westfield, Inc., 167 S.W.3d 401, 405 (Tex. App. San Antonio 2005) (“The terms of the fee agreement between the [Defendant] and its counsel are irrelevant to the [Defendant’s] right to recover reasonable and necessary attorney’s fees from the [Plaintiff].”) Instead, the winning party generally receives a judgment for “reasonable and necessary” attorney’s fees, which may be completely different from the fees that the party actually incurred. Interestingly enough, the terms of the party’s contract with his or her attorney may be completely irrelevant to the amount of fees that will be awarded at trial. Moreover, an attorney representing himself or his law firm can probably recover attorney’s fees for his or her own time spent on the case. McLeod, Alexander, Powel & Apffel, P.C. v. Quarles, 894 F.2d 1482, 1488 (5th Cir. Tex. 1990).

Contingency Fees:

When an attorney accepts a case based on a contingency fee, the contingency fee may be determined by the Court to be “reasonable and necessary.” Sloan v. Owners Ass’n of Westfield, Inc., 167 S.W.3d 401 (Tex. App. San Antonio 2005). Generally, “the fact that attorney’s fees are based on a contingent fee agreement does not make the fees requested or awarded unreasonable.” Cooper v. Cochran, 288 S.W.3d 522, 537 (Tex. App. Dallas 2009).

Winning on Some Claims and Losing on Other Claims:

If you prevail on some claims for which attorney’s fees are available, yet lose on other claims, then the attorney’s fee award gets very tricky. If your attorney provides detailed, itemized billing sheets and proves those sheets up in Court, then the sheets may be enough evidence for the Judge to break out the recoverable fees from the non-recoverable fees. Even if the bill sheets do not exist because it is a contingency fee case, your attorney should “reconstruct” the work to “provide the trial court with sufficient information to allow the court to perform a meaningful review of the fee.”
Long v. Griffin, 442 S.W.3d 253, 256 (Tex. 2014).

Copyright 2017, Ian Ghrist, All Rights Reserved.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Texas Tools for Recovering Assets on Behalf of Defrauded Investors

Financial Record Requests/Subpoenas:

In my experience, the financial record request is one of the most powerful tools for finding assets on behalf of defrauded investors. Section 30.007 of the Texas Civil Practice and Remedies Code provides that these requests are governed by Section 59.006 of the Texas Finance Code. In Texas Finance Code Section 59.006, you can find many rules regarding how the process works, but the key feature of this statute, in my opinion, is the burden placement. The statute places the burden on the party resisting discovery to obtain relief from the Court. That typically means filing a motion, drafting an affidavit, setting it for hearing, filing notice of hearing, dealing with scheduling conflicts, waiting through a long docket call, arguing the motion, possibly offering testimony, and finally obtaining a ruling. That is a lot of work. Consequently, the party resisting the discovery rarely puts up as much of a fight as they will when they are simply resisting discovery responses.

Resisting traditional discovery, like a Request for Production under Tex. R. Civ. P. 196, is much easier. For the most part, your attorney will simply pick one of the innumerable form objections that exist, write it down, state what is being produced and what is not being produced, and send it to opposing counsel. Then, the burden is on opposing counsel to file a Motion to Compel Discovery Responses, set it for hearing, deal with scheduling conflicts, wait through a long docket call, argue the motion, and obtain an order. Then, once the order has been obtained, there is the inevitable subsequent battle over the scope of the order. Again, the burden is on the one wanting the discovery to prosecute this. The bank, however, does not have a dog in the fight, so to speak, so the bank will typically produce more or less exactly what the bank has been asked to produce without raising countless objections and necessitating potentially expensive and time-consuming pre-trial hearings over the matter.

I am planning on adding more sections to this post in the future. Reading an article on these tools can be helpful, but using them to achieve your goals takes some finesse.

Copyright 2017, Ian Ghrist, All Rights Reserved.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney.

When the Statute of Limitations Begins to Run on Installment Loans

The short answer is that with installment loans, the statute of limitations begins to accrue on each installment as it comes due. Once the payments are accelerated, then the statute begins to run on the balance of the debt.

If the loan is on real estate, however, then the limitations period does not begin to run until the “maturity date of the last note, obligation, or installment.” Tex. Civ. Prac. & Rem. Code § 16.035(e). Section 16.035(e), however, does not apply when the note has been accelerated. See Hammann v. H.J. McMullen & Co., 122 Tex. 476, 62 S.W.2d 59, 61 (1933); Burney v. Citigroup Global Markets Realty Corp., 244 S.W.3d 900, 903–904 (Tex. App.—Dallas 2007, no pet.).

In Texas, “‘A cause of action accrues when an installment is due and unpaid.’ See Gabriel v. Alhabbal, 618 S.W.2d 894, 897 (Tex. Civ. App. — Houston [1st Dist.] 1981, writ ref’d n.r.e.); Goldfield v. Kassoff, 470 S.W.2d 216, 217 (Tex. Civ. App. — Houston [14th Dist.] 1971, no writ).” Stille v. Colborn, 740 S.W.2d 42, 44 (Tex. App. San Antonio 1987). The balance of a loan becomes due and unpaid upon acceleration. Id.

If the loan is for real estate, then the statute of limitations is four years and special provisions apply. Tex. Civ. Prac. & Rem. Code § 16.035. For example, “A sale of real property under a power of sale in a mortgage or deed of trust that creates a real property lien must be made not later than four years after the day the cause of action accrues.” Id. § 16.035(b).

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.

Contracts for Deed: Do the Volume-Dealer Penalties of Section 5.077(d) Have an “Anchoring” Requirement?

One bankruptcy court says yes. Here is an argument for the answer being no.

Under Section 5.077(d), the volume-dealer penalties apply to “A seller who conducts two or more transactions in a 12-month period under this section . . . .” One bankruptcy court has interpreted this provision as meaning that the volume-dealer penalties apply only when a second Contract for Deed has been executed within twelve-months of the Contract for Deed that is the subject of the case currently before the court. Dodson v. Perkins (In re Dodson), 2008 Bankr. LEXIS 4647, 20; 2008 WL 4621293 (Bankr. W.D. Tex. Oct. 16, 2008).

While the Dodson court concluded that Section 5.077(d) must be “anchored” to the signing of the contract being enforced, the court admitted that that court was unable to locate “any case law or other authority, nor any legislative history that would clarify the meaning of the 2005 Statute in this respect.” Id. The statute clearly states that any seller who conducts two transactions in any twelve-month period falls under Section 5.077(d). Texas Courts should not add an additional “anchoring” requirement to an otherwise straightforward statute. Furthermore, the “anchoring” requirement does not make the statute “easier to comply with and to enforce.” Id. at 22. Instead, an “anchoring” requirement would make relief under Section 5.077(d) nearly impossible to prove for many plaintiffs without expending exorbitant time and effort on investigations outside of the discovery process in order to corroborate defendants’ production or lack thereof. If the legislature wanted to add an “anchoring” requirement, then such a requirement would have been easy enough to draft. The legislature did not, however, add an “anchoring” requirement and such a requirement should not be imposed judicially.

Before the statute was amended in 2005, the $250 penalty applied to all Contract for Deed sellers. Id. at 6. The new statute carves out a very narrow niche of sellers—sellers who never conduct more than one qualifying transaction within one year—to be exempted from the harsh penalties and assessed only a nominal penalty of $100 per year. Consequently, an unsophisticated individual who owner-carries financing on his own home to a buyer, generally, will not accidentally lose that home to the harsher penalties. Meanwhile, volume dealers who own multiple properties and sell all or many of the properties by Contracts for Deed will incur the full, normal penalties that were applicable to all Contract for Deed sellers before the 2005 amendments carved out a narrow niche of sellers to exempt under Section 5.077(c). See Tex. Prop. Code § 5.077; Acts 2005, 79th Leg., ch. 978 (H.B. 1823), § 5, effective September 1, 2005.

For most plaintiffs, proving the statutory requirement of two contracts within twelve months creates enough of a hurdle without adding an even more difficult “anchoring” element.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.