The Status of Texas Usury Law

By: Jeffrey D. Dunn
Presented at the University of Houston Collecting Debts and Judgment Seminar
January 1, 2003

I. SCOPE OF ARTICLE
This article is a general overview of the status of Texas usury law with particular focus on the basic structure of usury law, legislative enactments under House Bill 955 and other bills that became effective September 1, 2005, and recent case law. State usury law may be preempted by federal law which should always be considered in any usury analysis, but federal preemption is largely beyond the scope of this article.

II. WHAT IS “USURY LAW”?
A cause of action for “usury” arises when interest on a loan of money or extension of credit is contracted for, charged or received in excess of the maximum amount of interest allowed by applicable law. Usury is a statutory claim that can result in penalties against the creditor, usually under Title 4 of the Texas Finance Code (herein the “TFC”). These laws, which are sometimes accompanied by consumer lender licensing requirements and regulation of certain lender terms and practices, are determined by the legislature as a matter of public policy. Given differences in state usury laws around the country and the prevalence of interstate lending, conflict of law principles also become a factor in applying these laws when a transaction has one or more contacts with Texas and another state.

Usury has an ancient history. The biblical notion of usury generally prohibits the collection of any compensation for a loan of money. In Ezekiel 18:13 the sin of usury is an abomination worthy of death. Dante’s Inferno encounters usurers in the third ring of the seventh circle of Hell. Compensation for money lenders became legal under English statutes in the 16th and 17th centuries based on the notion that the lender was receiving compensation for the lost opportunity of making a loan in lieu of investing capital for profit, or as a penalty for default, as opposed to compensation for making the loan. Allowable compensation came to be known as “interest,” although under some statutes a distinction was drawn between legal usury and excessive (unlawful) usury. By the time of Anglo-American dominance in Texas, in the 1840s, American and Texas laws had evolved to permit compensation for a loan (interest) by contract, while offering a remedy for the taking of interest in excess of a prescribed statutory rate (usury).

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