Usury

Key Takeaways

• Usury is charging a rate of interest higher than the law allows on a loan.
• Washington's general ceiling is the higher of 12 percent per year or 4 percentage points above the average 26 week Treasury bill rate, so the maximum floats with the market.
• A usurious contract is not void in Washington. The lender loses interest and the borrower is entitled to costs and reasonable attorney fees.
• Loans primarily for agricultural, commercial, investment, or business purposes are outside the usury defense in Washington, and corporations and similar entities cannot plead it at all.

What It Means

Usury is charging a rate of interest higher than the law permits. The reasoning is simple: a borrower who needs money is in a weak bargaining position, so the state sets a ceiling the parties cannot contract around. The rule bites on the interest rather than on the loan. A usurious note is still an enforceable obligation, and the borrower still owes the money that was advanced.

Two features make usury confusing for new brokers. First, the ceiling is not a single fixed number. Washington ties one prong of the test to a floating market rate, so the lawful maximum in a high rate year is higher than it was in a low rate year. Second, the ceiling does not protect everyone. Consumer borrowing is protected, while borrowing for a business, an investment property, or a farm generally is not.

Brokers run into usury in two places. It is one of the standard exceptions to coverage in a Title Insurance policy, so a usury claim is a risk the policy does not absorb. And it shapes seller financing, where the rate written into a Promissory Note has to sit under the ceiling on the day the note is signed.

How It Works in Washington

The ceiling is in RCW 19.52.020. Any rate of interest is legal so long as it does not exceed the higher of 12 percent per annum, or 4 percentage points above the equivalent coupon issue yield of the average bill rate for twenty-six week treasury bills. Because the second figure moves with the Treasury market, the lawful maximum is a number you look up for the period in which the loan is made, not a number you memorize once.

The consequence is in RCW 19.52.030, and it is severe without voiding the deal. The creditor is limited to the principal less the interest accruing at the contract rate. If interest has already been paid, the creditor is limited to the principal less twice the amount of interest paid and less all accrued unpaid interest, and the debtor is entitled to costs and reasonable attorneys' fees. Losing the interest twice over and paying the other side's lawyer is the deterrent.

RCW 19.52.080 decides who may raise the defense at all. Profit and nonprofit corporations, associations, trusts, general partnerships, joint ventures, limited partnerships, and governmental bodies may not plead usury, and no person may plead it where the transaction was primarily for agricultural, commercial, investment, or business purposes. That bar does not apply to a consumer transaction of any amount, meaning borrowing primarily for personal, family, or household purposes.

Example

Marcus Hale sells his Yakima rental to Angela Boyd and carries a $180,000 note secured by a second position Deed Of Trust so she can close. Angela will live in the house as her home. Marcus wants 15 percent interest because he considers the deal risky.

In the month they sign, the average 26 week Treasury bill rate is 4.1 percent, so 4 points above it is 8.1 percent. The higher of 8.1 percent and 12 percent is 12 percent, which makes 12 percent the lawful ceiling. Angela pays interest only at 15 percent for two years, $54,000 in all, then sues. Because she borrowed for her personal residence, RCW 19.52.080 leaves her free to plead usury. Under RCW 19.52.030 Marcus is limited to the principal less twice the interest paid, $180,000 less $108,000, so he recovers $72,000 of a $180,000 loan and owes Angela her costs and reasonable attorney fees. Three points over the line cost him $108,000 and the other side's legal bill.

Common Mistakes and Exam Traps

• The Washington ceiling is the higher of the two figures, not the lower. When 4 points above the Treasury bill rate comes out below 12 percent, 12 percent is still the lawful maximum.
• A usurious loan is not void in Washington. The borrower still owes the principal, while the lender loses interest and pays the borrower's costs and reasonable attorney fees.
• The ceiling floats. Because RCW 19.52.020 ties one prong to the 26 week Treasury bill rate, an answer of always 12 percent is incomplete.
• A commercial or investment property loan is not protected. Under RCW 19.52.080 a borrower cannot plead usury where the transaction was primarily for business, commercial, investment, or agricultural purposes.