Usury is defined by Black’s Law Dictionary as “…the charging of an illegal rate of interest.” In Arkansas, Courts have held that usury occurs when a lender charges more than the legally permissible maximum rate of interest, defined by Article 19, section 13 of the Arkansas Constitution, as amended by Amendment 60. Amendment 60 provides that the interest rate on “general loans” could be a maximum of five percentage points (5%) above the federal discount rate.
Further, under Arkansas law, for an agreement to be usurious, it must be so at the time it was entered into. The party asserting usury has the burden of proof, and the proof must be sustained by clear and convincing evidence. The intention to charge a usurious rate of interest will never be presumed, imputed, or inferred where the opposite result can be fairly and reasonably reached.
The penalties under Arkansas law for violating the above-referenced usury provisions are rather harsh. Specifically, usurious contracts are void as to the amount of usurious interest, and a party who has been subjected to usurious interest is entitled to recover double the amount of such interest.
However, the applicability of the above usury restrictions as applied to Arkansas State-Chartered Banks has recently been severely constricted by federal legislation. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (also referred to as the “Financial Services Modernization Act”). Section 731 of the Gramm-Leach-Bliley Act (codified at 12 U.S.C. § 1831u(f)) (“Section 731”) Section 731 functions to permit Arkansas banks to import the interest rate from other states in certain circumstances.
Section 731, as applied in Arkansas, states that the highest interest rate allowed in Arkansas will be the greater of either: (a) the maximum rate allowed by the home state of any branch bank located in the Arkansas or (b) the rate established by Arkansas’s usury law. Thus, if an out-of-state bank opened a branch in Arkansas and the home state of the out-of-state branch bank had no capped interest rate limit, there would, in effect, be no usury limit in Arkansas.
The Eight Circuit Court of Appeals has had a couple of opportunities to interpret the effect of Section 731 on Article 19, section 13 of the Arkansas Constitution, as amended by Amendment 60. In the lender-friendly opinions of Johnson v. Bank of Bentonville, 269 F.3d 894 (8th Cir.2001) and Jessup v. Pulaski Bank, 327 F.3d 682 (8th Cir.2003), the Eight Circuit affirmative ruled that Section 731 preempted the Arkansas Constitution as to defining the legal interest limits charged by Arkansas banks. Going one step further, the Jessup Court permitted an Arkansas bank to charge a an 18.5% interest rate as non-usurious because an Alabama bank (Regions Bank) maintained a branch in Arkansas and because Alabama law permits an interest rate at any rate agreed to by the parties.
While Courts have interpreted Section 731 to permit greater freedom in the usury rates charged by Arkansas banks, it should be noted that the usury limits in the Arkansas Constitution survive and remain in full-effect as to other institutions and retailers (e.g. used-car dealers).
The attorneys at Miller, Butler, Schneider, Pawlik, & Rozzell, PLLC, have significant experience in consulting financial institutions in the applicability and interpretation of Arkansas usury laws. If you have any questions about the current state of usury law in Arkansas, we encourage you to contact us.