§24.3 - Usury

• Jurisdiction: Washington

§24.3 USURY

Usury laws generally prohibit interest rates above a certain level. Both state and federal laws impact permissible interest rates on certain loans.

(1) Washington law

The general Washington usury statute, Chapter 19.52 RCW, governs permissible interest and fees on a loan transaction unless one of the following is applicable:

(1)	the transaction qualifies for an outright usury exemption under state law, see §24.3(l)(e)(i), below;
(2)	the transaction is governed by a special purpose state statute with its own rules on permissible fees and interest rates, see §24.3(l)(e)(ii), below or
(3)	the transaction is subject to one of the federal usury preemptions, see §24.3(2) below.

The penalties for usury in Washington are drastic. Usury does not render the loan documents invalid as a whole, but the lender is limited by RCW 19.52.030 to recovery of its principal less twice the amount of the interest paid and less the amount of accrued unpaid interest. Note that the measure of the borrower's recovery is based on the entire interest on the loan, not just the usurious portion of the interest. Ausury violation is also a violation of the Washington Consumer Protection Act, which entitles the borrower to treble damages up to $10,000 and actual damages in excess of that amount. Both the usury statute and the Consumer Protection Act provide for recovery of attorney fees by the borrower in addition to damages. A declaratory judgment to establish whether a loan is usurious may be brought by the borrower (if a natural person) or the lender within six months after the loan isrepaid or the final payment on the loan is due, whichever occurs first. RCW 19.52.032.

(a) Who may assert usury?

This section outlines which parties may bring an action for damages for usury or can assert usury as a defense in an action to enforce a loan.

(i) Borrower

The borrower may maintain an action against the lender to recover statutory damages for usury or may assert usury as a defense in an action to enforce the loan documents.

Comment: Unlike the law in some other states, usury law in Washington reduces the amount the lender is entitled to collect but is not a complete defense to enforcement of the documents.

It makes no difference whether the borrower is a natural person as there is no "corporate defense" to usury in Washington apart from the "business loan" exemption (discussed below). Paulman v. Filtercorp, Inc., 127 Wn.2d 387, 899 P.2d 1259 (1995). Of course, in most circumstances, a loan to a corporation, partnership, or other entity, rather than to an individual, will be for business purposes and exempt from usury on that basis. See §24.3(l)(e)(i), below.

(ii) Guarantor

There is no case law in Washington addressing the ability of a guarantor to claim usury. The guarantor probably could not maintain a separate action for damages but certainly could avoid paying the usurious portion of the interest.

(iii) Subsequent purchaser of collateral or junior lienholder

As a general rule, only the original debtor or borrower may maintain an action to recover statutory damages for usury. Demopolis u. Galvin, 57 Wn.App. 47, 786 P.2d 804, review denied, 115 Wn.2d 1006 (1990). However, a subsequent purchaser of the collateral who assumes the loan may maintain an action for usury independently and may recover the statutory penalties if the interest and assumption fees paid by the purchaser are themselves usurious when spread over the remaining loan term, provided the assumption is treated legally as a novation. The purchaser who acquires the property subject to ausurious loan but does not formally assume the loan cannot recover the statutory usury penalties but may recover the usurious portion of the interest payments made by the purchaser. Id. at 53.

(iv) In-state borrower/out-of-state lender

RCW 19.52.034 provides that whenever a loan is made outside Washington state to a person residing within the state of Washington, the Washington usury laws shall apply to the same extent as if the loan were made in Washington. Choice of law provisions in loan documents will not be enforced if the effect would be to make an otherwise usurious transaction nonusurious, at least when the borrower resides in Washington. Whitaker v. Spiegel, Inc., 95 Wn.2d 661, 637 P.2d 235 (1981); O'Brien v. Shearson Hayden Stone, Inc., 93 Wn.2d 51, 605 P.2d 779 (1980).

(v) In-state collateral/out-of-state borrower and lender

Unlike the circumstance in which the borrower is located in Washington, there is no statute governing situations in which the collateral is located in Washington but the borrower and lender are located out of state. In such circumstances, a Washington court will respect the parties' choice of law. Golden Horse Farms, Inc. v. Parcher, 29 Wn.App. 650, 629 P.2d 1353, review denied, 96 Wn.2d 1012 (1981); Bank v. Doherty, 42 Wash. 317, 84 P. 872 (1906).

(b) Permissible interest rates

This subsection discusses the maximum interest rate allowable under Chapter 19.52 RCW for various types of loans.

(i) Fixed-rate loans

RCW 19.52.020(1) allows a lender to charge the higher of 12 percent per annum or four percent per annum above the 26-week Treasury Bill (T-Bill) rate. The statute contains a technical definition of the "26-week T-Bill rate," and the current rate is published in a variety of places, including the Washington State Register and the Washington State Bar News. The lender can use either the rate in effect at the time the loan is made or the rate in effect at the time the loan commitment is issued. RCW 19.52.020(3). See §24.3(l)(b)(iv), below.

(ii) Variable-rate loans

On a variable-rate loan, RCW 19.52.020 allows the lender to charge a variable rate equal to the higher of 12 percent per annumor four percent per annum above the 26-week T-Bill rate. The usury ceiling is determined initially at the time the loan is committed for or funded (see §24.3(l)(b)(iv), below) and reset at the time of each interest rate adjustment based on the then-applicable 26-weekT-Bill rate. RCW 19.52.020(l)(b)(ii).

(iii) Revolving lines of credit

The maximum permissible interest rate on a variable- rate revolving line of credit is determined in the same manner as any other variable-rate loan, except that because billing cycles typically span two calendar months, the statute provides that interest for the billing cycle is not usurious if on any one day during the billing cycle the rate is not usurious. RCW 19.52.020(3).

(iv) When rate is computed

Typically, the permissible usury ceiling will be that in effect at the time closing of the loan occurs and in the case of a variable-rate loan, the time of each adjustment. However, RCW 19.52.020(3) gives lenders the option of using the rate in effect at the time the loan was committed...