Colorado Usury
| Publication year | 1982 |
| Pages | 2557 |
| Citation | Vol. 11 No. 10 Pg. 2557 |
1982, October, Pg. 2557. Colorado Usury
Until recent times, there has been relatively little concern over Colorado's usury statutes. The ceilings applicable to Colorado credit transactions appeared to be comfortably above those which competition in the credit marketplace would dictate. In the past few years, however, creditors have been discovering that rates which the marketplace was setting were higher than those which Colorado law would allow. To be more specific, lenders became concerned that they could no longer make ends meet---that the cost of their loanable funds was so high that lending at the rates permitted in Colorado was no longer profitable. While some would argue that this was a long-awaited form of poetic justice (since no one else could make ends meet either), economists tell us that this is a reasonably short-sighted attitude, the theory being that financially healthy creditors are important to a generally healthy economy. In any event, the recent phenomenon of high costs of credit, both from the lender's and the borrower's point of view, has generated new interest in Colorado laws placing limits on what creditors may charge borrowers for the renting of money.
This article deals with Colorado's usury laws, but in a manner which must inevitably be considered over-simplified. The current state of the art (and the legislation) is such that there are more questions to be asked than answers to be given. It is hoped, however, that the reader will at least be left with something of a feel for how the system works and will have had his or her consciousness raised to the point where the complexities involved are appreciated.
A first important point to remember when dealing with this subject is that most of the questions and most of the answers are to be looked for (but not necessarily found) in the Uniform Consumer Credit Code ("UCCC"), Title 5 of the Colorado Revised Statutes (1973). It must be kept in mind, however, that Colorado's version of the UCCC bears only a modest resemblance to the uniform act promulgated by the National Conference of Commissioners on Uniform State Laws, and is a masterpiece of ambiguity which has befuddled both lawyer and judge alike, with the result that it has largely escaped judicial scrutiny. In other words, the attorney cannot count on appellate court decisions to provide much assistance in understanding the UCCC's more confusing parts.
It should also be kept in mind that the Colorado UCCC Administrator's Office over the past several years has issued a substantial number of both unofficial and official interpretations of various provisions of the UCCC. These are not published in any readily accessible place. Nonetheless, attorneys are well advised to locate, study and give credence to these interpretations when researching questions under the UCCC. This is so because creditors who act in good faith in accordance with these interpretations (at least the official ones and arguably the unofficial ones) escape liability under the statute even if a court should subsequently hold the interpretation invalid.(fn1) The UCCC Administrator's Office will assist in providing copies of any interpretations issued on a particular topic and is generally quite helpful in responding to other inquiries concerning the UCCC, including providing written replies to specific written questions.
Another important point is that the UCCC does not set interest rate ceilings. Rather, it sets ceilings on rates of finance charges (called "credit service charges" in the context of a credit sale) stated as annual percentage rates ("APRs"). This means that finance charges other than interest must be taken into account. One immediate problem which is thereby created has to do with what is and what is not a finance charge. The APR system also creates complex mathematical problems which only the computer industry appears to be capable of dealing with (and one is not always sure of that).(fn2)
A third important point is that in order to determine the applicable finance charge rate restriction for any particular credit transaction, it is first necessary to categorize the transaction; that is, the transaction must be put into its proper box. Assuming that the right box can be found, it is relatively easy to determine the applicable rate restriction. If appropriate data processing equipment or APR tables are available, and it can be determined what is and what is not a finance charge, it is then possible to determine if the transaction has exceeded the applicable rate limitation. Unfortunately, putting the transaction into the proper box is often the hardest problem of all.
Finally, the UCCC was written with the intent that it should fit together neatly with the original federal Truth-In-Lending Act and Federal Reserve Board Regulation Z ("Reg. Z"). In 1980, however, Congress passed the Truth-In-Lending Simplification and Reform Act, and in 1981 the Federal Reserve Board issued a completely rewritten Reg. Z and an Official Commentary thereto. Although the UCCC has been amended here and there to conform to the current state of the federal law, there are still some important differences remaining between federal and Colorado law which have resulted from these recent changes. This situation has added additional elements of confusion to the subject of Colorado usury.
For purposes of this discussion, the assumption is made that the UCCC is in fact controlling---that both creditor and debtor are located in Colorado and that there is no federal preemption at work. The UCCC, however, does have a rather complex choice of laws provision (§ 5-1-201) and this should always be looked to when either the creditor or the debtor is not located in Colorado. In such circumstances, the UCCC rate restrictions may not apply. Also, there are limited types of federal preemption at work in the area of usury and, under some circumstances, federal law could permit rates to be charged which are higher than those provided for in the UCCC. Since federal preemption is itself a complex subject, some elaboration is in order.
In 1979, Congress enacted a series of measures designed to override state usury limitations applicable to specific types of loans. Most of this legislation has been superseded by the Depository Institutions Deregulation and Monetary Control Act of 1980 (Public Law 96-221, as amended by Public Law 96-339). This Act preempts state usury limitations on loans secured by first mortgages on residential real property or mobile homes; provides an alternative interest rate limitation on business and agricultural loans of $1,000 or more made by any person; and provides alternative interest rate limitations for loans made by state-chartered federally insured banks, federally insured credit unions, insured institutions defined in the National Housing Act(fn3) and small business investment companies. If the alternative rates exceed the rates permitted by state law or constitution, the creditor is entitled to charge interest at the federally prescribed alternative rate, and the state law or constitution prescribing the lower rate is preempted.
With respect to loans subject to Colorado law and made on or after July 1, 1981, all of this is of but academic interest. On that date, House Bill 1178 became effective. This bill overrode the federal interest/usury preemptions contained in Public Law 96-221 by the addition of Article 13 to Colorado's UCCC. Loans made in Colorado on or after April 1, 1980, but before July 1, 1981, remain subject to the provisions of Public Law 96-221.
Aside from Public Law 96-221, three remaining types of loans are subject (or potentially subject) to federal preemption of Colorado's interest/usury limitations. Section 308 of Public Law 96-153 amended the national Housing Act to deny the applicability of any state's usury law to loans insured under either Title 1 or 2 of the National Housing Act. Section 401 of Public Law 96-128 extended the preemption contained in Public Law 96-153 to loans guaranteed or insured by the Veteran's Administration.
A final potential preeemption of Colorado interest/usury limitations applicable to loans made by national banks is contained in § 85 of the National Bank Act. That section governs interest rates which may be charged by national banks. Generally, a national bank may charge interest at the higher of the rate allowed any lender making comparable loans by the laws of the state in which the bank is "located" (i.e., where it is chartered)(fn4) or at a rate 1 percentage point in excess of the discount rate on ninety-day commercial paper in effect at the Federal Reserve Bank for the district where the bank is located.
Some observations regarding § 85 are appropriate. First, in Marquette National Bank of Minneapolis v. First of Omaha Service Corp.(fn5), the Supreme Court indicated that when a national bank makes loans to customers located outside the state in which the bank is located, the bank may comply with the interest rate limitations set by the laws of the state in which it is located, as prescribed by § 85. The bank is not bound by the interest rate limitations of the laws of the state in which the customer is located. Thus, the door is open for a national bank located outside of Colorado to export a foreign interest rate into Colorado.
Second, there is some authority to the effect that a national bank located in one state making a loan to a customer in another state...
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