Not Interested in Usury? A Crime of Biblical Proportions
There are not many issues on which Tucker Carlson agrees with Alexandria Ocasio-Cortez and Bernie Sanders. One, however, is a federal cap on interest rates. Even more interesting, they have cited the Bible as their basis for mandating such a cap. Indeed, the Bible condemns the sin of “usury,” or the charging of high interest rates.
Although this federal cap never happened, Colorado nonetheless prohibits excessive interest rates. However, Colorado’s cap, in comparison to many other states, is extremely generous to creditors. This is just one reason why the Colorado real estate market is so attractive for investors.
This blog analyzes Colorado’s usury law regarding nonconsumer (business) loans so you can ensure your loan complies.
What is usury?
Usury laws prohibit creditors from charging excessive interest rates. In Colorado, the highest interest rate a creditor can charge a debtor for a non-consumer loan is 45% per year.
Under the Colorado usury statute, the parties of a nonconsumer loan can agree to have the debtor pay charges “as an incident to or as a condition of the extension of credit” as long as the “sum of all charges” does not exceed 45% per annum (per year). If, however, the parties do not agree on an interest rate, the default is 8%. This 45% ceiling does not apply to savings, mortgages, business loans, and agricultural loans.
What is “interest” for purposes of Colorado usury law?
The usury statute defines “interest” broadly as “the sum of all charges payable directly or indirectly by a debtor and imposed directly or indirectly by a lender as an incident to or as a condition of the extension of credit to the debtor…” Because of this broad definition, late charges and forbearance fees fit within the statutory definition of interest as well.
How do I calculate interest to determine if my loan is usurious?
First, you calculate usury by using the total rate of interest that the borrower is subjected to during a given extension of credit. Next, you add all the charges imposed as a condition of the extension of credit to determine whether the sum total exceeds the 45% cap.
Then, if applicable, you must consider the rates charged during a forbearance period. These rates must be assessed during the forbearance period only and, likewise, cannot exceed the 45% cap when added to the per annum interest rates. The forbearance fee must be annualized using only the timeframe of forbearance as the annualization period. The resulting interest rate must then be added to any other charges accruing during that period to arrive at the effective interest rate, i.e. “the sum of all charges.”
Late charges are also considered interest for purposes of usury. Late charges must be combined with other interest charges, and may not exceed the 45% per annum ceiling under the statute. Moreover, if a fee or other charge can be converted into a percentage rate, it can be categorized as interest.
Are there exemptions from the 45% ceiling?
Yes. Generally, mortgages, deeds of trust, commercial credit plans, and the retention of a deposit are all exempt from the usury cap. Specifically, for mortgages and deeds of trusts, if the lender makes the periodic disbursement of part of the loan proceeds over a period of time, then the mortgage or deed of trust is exempt. Commercial credit plans are also exempt, and because the retention of a deposit is not considered interest, they are also exempt from the 45% ceiling.
Is Colorado state usury law preempted by federal law?
No. Colorado has opted out of certain federal statutes purporting to preempt (override) state usury limits. Colorado will not apply federal statutes preempting state interest rates and finance charges with respect to mortgages, business or agricultural loans, or small business loans. In such instances, the rates established by Colorado law apply to consumer credit transactions.
How can I defend a claim that I violated Colorado usury law?
There are two affirmative defenses to usury.
(Un)foreseeability — At the time of making the loan finance charge, it could not have been determined that the annual percentage rate would exceed 45% a year (but later fees exceeding 45% are foreseeable and potentially usurious).
Debtor/Borrower’s Nonpayment —The loan finance charge was not in excess of 45% a year when the rate of the finance charge was calculated on the unpaid balance of the debt on the assumption that the debt is to be paid according to its terms and is not paid before the end of the agreed term.
How can I defend against a claim for failure to pay a promissory note?
Defense to the enforcement of promissory notes is limited, especially if there is a cognovit provision. A cognovit provision is one in which the debtor agrees in advance to the creditor obtaining a judgment without a hearing. By definition, a cognovit provision in a promissory note cuts off every defense, except payment, which the maker of the note may have against enforcement of the note. As long as you signed the note, you are obligated to pay it and do not have a bona fide defense for nonpayment.
With that said, you may raise the following defenses if the note is usurious:
Equitable estoppel (for example, if the creditor did not act to collect amounts not paid) may sometimes be asserted as a defense, but it is rarely successful.
A claim of lack of consideration (there was nothing bargained for and received by a creditor from the debtor).
Fraud, error, or other vices of consent (circumstances affecting the nature of consciousness and the free will to conclude a legal act).
A lender’s failure to comply with federal regulations is not a valid defense to failure to pay a promissory note. Furthermore, a lender’s bad faith does not necessarily preclude recovery on a promissory note.
What are my remedies for a usurious contract?
Generally, a court will declare a usurious contract void but only to the extent that the interest is usurious. Thus, even if a note is usurious, a creditor is entitled to interest at the 45% maximum rate allowable under the statute.
If you are dealing with a usury problem or have any usury questions, fill out an interest form today to see if GLO can help you.
GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific fee arrangements and signed engagement letters. GLO does not guarantee any results.