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Consumer Credit Regulation: 7.4.7 Punitive Damages

While an arbitrator may be less likely to award punitive damages than a jury, this is partially offset by the fact that there is much less court review of an arbitrator’s punitive damages award.121 Instead of a judge remitting the jury award and appellate courts reviewing the resulting award, an arbitrator’s award is subject only to very narrow judicial review.122 In fact, the defendant may not even have a due process claim concerning the size of the award, since the arbitration is a non-governm

Consumer Credit Regulation: 7.5.1.1 Overview of Elements

In the traditional usury case courts often recite four elements that a borrower must establish: (1) the existence of a loan or forbearance; (2) an absolute obligation to repay principal; (3) an interest overcharge; and (4) the usurious intent of the lender.126

Consumer Credit Regulation: 7.5.1.2 Burden of Proof

Courts generally presume the validity of contracts. Therefore, a party who claims that a contract is usurious carries the burden of proving the usury, whether the claim is being asserted as an independent cause of action or as an affirmative defense.135 Each of the statutory elements must be proved in court. If usury is being raised defensively, usury may be an affirmative defense that must be pleaded or lost.136

Consumer Credit Regulation: 7.5.1.3 Standard of Proof

The precise standard of proof by which usury must be demonstrated varies significantly from jurisdiction to jurisdiction, and splits of authority within individual states are common.140 Nevertheless, the most frequently applied standards in civil usury cases are “clear and convincing” evidence141 and “preponderance of the evidence”142 or some variation of these tests.143 Courts are more likely to appl

Consumer Credit Regulation: 7.5.1.4 Contract Construction

Issues of contract construction typically arise in usury cases in connection with the proof of some of the elements of usury. Most notably, a court’s interpretation of a contract may determine its finding of usurious intent, the absolute obligation of the debtor to repay principal, or the presence of an overcharge.

Consumer Credit Regulation: 7.5.2.2.1 Time-price exception to usury laws

Absent specific statutory guidance, the chief uncertainty about the definition of a loan is whether this term includes credit extended in connection with the installment sale of goods or services. When interpreting a statute that applies only to loans, not to the forbearance of an obligation or the detention of money, courts may require the debtor to show that the transaction involved a transfer of money that was to be repaid, thereby excluding purchase and sale transactions.180

Consumer Credit Regulation: 7.5.2.2.2 The erosion of the time-price doctrine: direct regulation of consumer credit sales and RISAs

The time-price usury exception has been rendered irrelevant to consumer credit transactions in most jurisdictions by the enactment of retail installment sales acts (RISAs) or consumer credit codes.198 Although some states amended their statutes in the 1980s to permit any interest rate to which the parties agreed, most of these laws impose ceilings on the charges that may be assessed in connection with consumer credit sales.

Consumer Credit Regulation: 7.5.2.3 Forbearance and Detention

Usury statutes generally apply not only to loans but also to forbearances. A forbearance is an agreement between a creditor and debtor under which the creditor defers the enforcement of a debt which has come due in return for the debtor’s payment of interest on that debt.205 For example, if a balloon payment came due on a mortgage and the debtor was unable to make the payment, the lender might agree to forbear collection of the balloon payment for a year in return for continued or increased interest payments.

Consumer Credit Regulation: 7.5.3.1 Overview

It is often stated that the second element of a traditional usury case is the debtor’s absolute obligation to repay the principal amount of the money transferred to him or her.222 To the extent that this second element exists, it is closely intertwined with the first, i.e., the existence of a loan, because in the absence of an absolute obligation to repay, it is quite plausible to argue that a transfer of money is a gift or an investment rather than a loan.

Consumer Credit Regulation: 7.5.3.4 Does a Contingency Create a Real and Substantial Risk of Nonpayment, Beyond the Risks Inherent in Any Loan?

Repayment will not be considered contingent unless the lender, by the terms of the loan, is subjected to some greater hazard than that the borrower will fail to repay the loan or that the security will depreciate in value.260 A transaction will be treated as a loan where the contingency under which the obligor may avoid repayment is a practical impossibility.261 For example, in a Florida case, a contract supposedly for the construction and purchase of a condominium complex was found to be a usur

Consumer Credit Regulation: 7.5.4.1 General

The heart of every usury case is an overcharge of interest. Logically, this element of proof can be divided into three parts:

  • ● The creditor exacted or attempted to exact payments from the debtor.
  • ● The payments were “interest” under the relevant usury statute.
  • ● The total of payments exceeded the statutory limit.292

Consumer Credit Regulation: 7.5.5.1 When Proof of Intent Is Required

Typically, the final element of a usury claim is the usurious intent of the lender. Generally, intent requirements are not expressly stated in usury statutes, but have been inferred by the courts. Some courts have inferred an intent requirement from the existence of a bona fide error defense.338 However, the better view is that the existence of a bona fide error defense shows that intent is not an element that the plaintiff must prove, but is a defense that the lender has the burden of raising and proving.

Consumer Credit Regulation: 7.5.5.3 Usury Not Apparent on Face of Contract

In many cases, a credit contract is not usurious on its face. The usury may be based on the exposure of “hidden interest,” the occurrence of some contingency such as acceleration, or the revelation of the extension of credit in a disguised credit contract. In such situations, the courts apply a broad spectrum of approaches to determine the existence of usurious intent. Although decisions within most jurisdictions show some inconsistency, three overall approaches seem to exist.

Consumer Credit Regulation: 7.5.5.4 Inference of Intent

In the majority of consumer transactions, a court’s decision to view usurious intent as a question of fact should not prevent a finding of usury even if subjective intent is at issue. The court will examine all the circumstances surrounding the transaction in deciding whether to infer intent.

Consumer Credit Regulation: 7.6.1 Exceeding an “Agreed Rate” Cap

In the late 1970s and early 1980s, numerous state legislatures decided to remove interest ceilings on some or all types of credit transactions.362 However, even in deregulated states, there usually remain benchmarks that give a consumer possible claims or defenses if a creditor violates them.

Consumer Credit Regulation: 7.6.2 Hidden Interest in Agreed Rate Transactions

Because these statutes are pegged to an agreed rate, issues of hidden interest are just as relevant as with statutorily defined numerical rate caps. In fact, they may be more relevant, as the prospect of lending in a deregulated environment may make some lenders feel more comfortable taking chances at the margins of acceptable practices.