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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.

Consumer Credit Regulation: 7.7.1.1 Requirement of Standing

Noting that usury statutes are designed to protect needy borrowers rather than to penalize lenders, courts have widely viewed usury as a claim that is personal to the borrower.400 This rule is frequently raised by creditors as a defense in usury actions where the party seeking to assert usury is not the same party who received the credit proceeds. The issue is often framed as one of standing to assert usury. Standing is a question of law for the court.401

Consumer Credit Regulation: 7.7.1.2 Guarantors and Sureties

Most cases where creditors dispute a plaintiff’s standing to assert usury involve guarantors or sureties to a debt, and most courts hold that guarantors and sureties do not have standing to assert usury.407 Litigation regarding guarantors typically involves loans to close corporations secured by the individual guaranty of a major stockholder.

Consumer Credit Regulation: 7.7.1.3 Assignees

Another party whose standing to assert usury may be questioned is the assignee of a credit buyer—i.e., the person who purchases used goods and who, in so doing, assumes the original buyer’s rights and obligations under the original credit contract.

Consumer Credit Regulation: 7.7.1.4 Other Standing Issues

One case holds that a borrower who is seeking an affirmative usury remedy under section 86 of the National Bank Act and who has not paid the challenged charges does not have standing.422 This issue is usually analyzed in terms of whether one of the necessary elements of a prima facie usury claim has been met, rather than as a standing question, however.423

Consumer Credit Regulation: 7.7.2.1 Overview

Estoppel is a loosely defined equitable doctrine under which a party may be barred from asserting legal or factual claims in court for any one of numerous reasons including fraud, misrepresentation, previous judicial rulings (i.e., “collateral estoppel”), or waiver.

Consumer Credit Regulation: 7.7.2.2 Borrower’s Knowledge

The most common reason for estoppel asserted by lenders is that the borrower knew that the terms of the loan were usurious at the time of the transaction and induced the lender to issue a loan that the borrower knew would not have to be repaid.

Consumer Credit Regulation: 7.7.2.3 False Contractual Statements

A second situation in which creditors raise estoppel as a usury defense centers upon contract clauses through which the borrower purportedly attests to the existence of facts which may exclude the transaction from the scope of usury statutes. For example, a loan contract executed in a jurisdiction that does not regulate interest rates on business loans may state that the borrower intends to use the loan proceeds for business purposes. Lenders have claimed that such a clause estops the borrower from asserting that the transaction was actually a personal loan at a usurious interest rate.

Consumer Credit Regulation: 7.7.3.3.2 Waiver as an alternate approach

Rather than considering whether a refinancing agreement constitutes a novation which may purge usury, a few courts have framed the question as whether the refinancing agreement constitutes a settlement and release of the parties’ outstanding claims against each other, including usury.474 It is generally recognized that the parties to a usurious agreement may enter into a settlement of a usury claim provided that the agreement is negotiated at arm’s length.475 Thus, it is possible to view the iss

Consumer Credit Regulation: 7.7.4.3 A Subsequent Event Generally Does Not Make Credit Usurious

Clearly some subsequent events can make a legal credit transaction usurious. If a credit agreement gives the creditor the right to raise the interest rate, a later increase to a rate above that allowed by applicable law would undoubtedly be usurious. Thus, an adjustable rate pegged to an index that rises to the point that the rate becomes usurious would likely violate a state’s usury law.502

Consumer Credit Regulation: 7.7.5 Res Judicata

Closely related to the defense of equitable estoppel is the doctrine of res judicata, which prohibits the relitigation of issues previously decided by the courts. Essentially, a judgment estops the parties to that judgment, outside of the normal appeals process, from continuing to contest any issues decided by the judgment. Judicial settlements, if negotiated at arm’s length, may constitute a similar bar although technically they may operate as a release or waiver rather than res judicata.518

Consumer Credit Regulation: 7.7.6.1 Nature and Origin of the Voluntary Payment Doctrine

A borrower who has already made payments on a usurious loan may have to contend with an ancient and sporadically recognized defense—the voluntary payment doctrine. The doctrine developed in tax cases, and was created to prevent those who had paid illegally imposed taxes from recouping their payments from the tax collector.529 The basis for the doctrine lies in the fiscal concerns of a government that may need to be certain of the amount of funds available for disbursement.

Consumer Credit Regulation: 7.7.6.2 Does the Voluntary Payment Doctrine Apply Beyond Tax Payments?

In some states, the voluntary payment doctrine has been extended to payments not just to taxing authorities, but also to private businesses.537 As with the taxing authority version, the voluntary payment defense is rationalized on the basis that it allows one who receives payment to rely upon those funds, and that it operates as a means to settle disputes without resort to courts by requiring the person asserting an overcharge to notify the payee before payment.538 These are, essentially, argume

Consumer Credit Regulation: 7.7.6.3 Usury Cases

Though lenders have asserted the voluntary payment defense in usury cases, the majority of jurisdictions addressing the issue have refused to apply it in those circumstances.542 Even where the voluntary payment doctrine is accepted in other contexts, courts have recognized that strong policy reasons argue against applying it in usury cases.