January 13, 2006
Usury Update: Texas
Posted by Christine Hurt

Usury From time to time, as I guess the only person around who actually likes usury laws, I post on the topic.  So, I'll give a little update.  Just Wednesday, I told students about usury laws, using Texas as an example of a state that was pro-consumer and had Draconian penalties for usury.  As I'm cleaning off my desk, I thumb through the Year in Review issue of the Texas Bar Journal, which contains short updates on Texas Law (p. 27-28, "Usury Reform").  Apparently, the Texas Legislature revised the Texas Finance Code provisions regarding usury effective in September of 2005.

Texas law is interesting in and of itself in that many "day-to-day" laws are in the Constitution, which is updated all the time and very long.  As an example, the legislature has the authority to act by statute to "define interest and fix the maximum rates of interest," but any exemption from the usury laws as to categories of loans must be in the Constitution.  So, the legislature proposed an amendment to exempt commercial loans of $500k or more (if not secured by real property) from the usury laws.  However, the voters rejected the amendment on Nov. 8, 2005.  (Note that NY, for example, exempts commercial loans from usury laws.)  But, the legislature used its statutory power to whittle away the usury laws by exempting prepayment fees, make-whole premiums, and some late fees from the definition of interest.  In addition, the legislature lessened the penalties for usury, including forfeiture of principal in extreme cases.

These resulting changes are the exact opposite of how usury laws would work in Christytopia.  I would have a small sphere of loans that were subject to usury laws, primarily consumer loans, but the penalty for usury violations would be very severe.  The bifurcation of power here seems to have created a fairly weird, and bad, result.

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