One of the greatest misconceptions of Arizona law is that usury is no longer a viable cause of action. In the 1980s, Arizona amended the usury laws to remove the interest rate ceiling. As a result, today’s usury laws essentially authorize lenders to contract for any interest rate. However, usury remains a viable defense against lenders who breach their own contracts by charging fees that aren’t allowed.
Arizona’s usury law prohibits charging interest in excess of the maximum legal rate. The prohibition applies broadly to any person who “directly or indirectly take[s] or receive[s]” excess interest. Excess interest includes “any greater sum or any greater value for the loan or forbearance of any money, goods or things in action, than the maximum permitted by law.” In other words, any payment made in exchange for a forbearance of money is interest.
Late fees are a common form of interest. The late fees are charged if a monthly payment is untimely. In other words, it is the lender’s compensation for additional forbearance of money resulting from a late payment.
In addition, many lenders require fees to modify loans. They often call the initial fee for a modification a “good faith payment.” Of course, these fees aren’t prohibited anymore than late fees. However, because they are interest, they cannot exceed the amount allowed by law.
A.R.S. § 44-1201(A) limits interest collection to an amount agreed to by contract: “Interest on any loan, indebtedness or other obligation shall be at the rate of ten percent per annum, unless a different rate is contracted for in writing, in which event any rate of interest may be agreed to.” Arizona Courts have expressly the rejected the contention that the Legislature implicitly repealed the usury defense when it allowed parties to contract for any rate. To the contrary, “when the legislature removed the interest rate ceiling in the general usury statute, allowing the parties to contract in writing for any interest rate, the legislature also amended the forfeiture provision to provide for forfeiture of all interest if a person contracted for, reserved or received, directly or indirectly, an amount greater than the ‘maximum permitted by law.” Wieman v. Roysden,166 Ariz. 281, 283 (Ariz. Ct. App. 1990). Adding the language “maximum permitted by law” while simultaneously allowing parties to contract for any interest rate establishes the contract rate as the legal limit on interest. Id. In other words, the contract limits the amount a lender may lawfully charge, and any attempt to exact payments in excess of the contract rate for the forbearance of money is usury. So, for example, if a lender changes policy and charges a late fee that wasn’t explicitly allowed by contract, that is usurious.
Any lender who breaches its own contract by “reserving or receiving, directly or indirectly,” any interest in excess of the contract amount “shall, forfeit all interest.” If a lender charges excess interest, the borrower is entitled to set off any interest he previously paid against the principal balance of the debt. So, if a lender imposes late fees exceeding the amount allowed by contract, it breaches its own contract and forfeits the right to collect interest.
That is potentially a harsh remedy, and lenders have some protection from simple clerical errors. For example, Arizona law imposes an intent requirement on usury violations. A lender acts intentionally only if it intends to charge the amount it charges and that amount is usurious. So, for instance, if a lender over charges a late fee due to an accounting error and corrects it promptly when the borrower brings it to its attention, it probably won’t forfeit all interest. But if the lender receives actual knowledge of the error and refuses to correct it, that is strong evidence of intent.
For lenders, the key takeaway is to be very careful about late fees. Always read the contract carefully to confirm the interest and late fees being charged. For borrowers, challenging these fees has a significant upside if the lender refuses to correct them.
If you or someone you know has questions regarding mortgages or private lending issues, contact our office today to schedule a consultation with Attorney Samuel J. Doncaster, IV or Christopher J. Charles.
Samuel J. Doncaster, IV is an Attorney with Provident Law®. Mr. Doncaster’s practice focuses on commercial and real estate litigation. After graduating in the top five in his class from Sandra Day O’Connor College of Law at ASU with honors, Order of the Coif, Summa Cum Laude and as a Pedrick Scholar, Sam secured a prestigious clerkship with the Arizona Court of Appeals, where he worked directly with an appellate judge drafting legal opinions. He worked side by side with this judge, learning how judges make decisions and how to persuade them. Of course, he uses these valuable lessons today to protect his clients’ legal interests.
Sam has developed a reputation as a tireless advocate and a creative thinker. His frequent success with “outside the box” legal solutions has earned him a loyal client base and notoriety as the person to speak to on tough cases.