Is the interest rate in our Iowa contract lawful?
Iowa's general ceiling is a published floating rate, with a wide list of borrowers who may agree to any rate at all. The maximum lawful rate that may be provided for in a written agreement entered into during a calendar month on or after April 13, 1979 is two percentage points above the monthly average ten-year constant maturity interest rate of United States government notes and bonds published by the Board of Governors of the Federal Reserve System for the second preceding calendar month, rounded to the nearest one-fourth of one percent per year (Iowa Code § 535.2(3)(a)(1)); the superintendent of banking determines and publishes that rate each month, and "This maximum lawful rate of interest shall be effective on the first day of the calendar month following publication." Where the parties have not agreed in writing, the rate on money due by express contract, money loaned and the other listed cases is five cents on the hundred by the year (§ 535.2(1)). But the persons listed in § 535.2(2)(a) "may agree in writing to pay any rate of interest", and a person so agreeing "shall not plead or interpose the claim or defense of usury in any action or proceeding", and the list has five items: a person borrowing to acquire real property or refinance a contract for deed; a person borrowing above the threshold amount "for the purpose of constructing improvements on real property, whether or not the real property is owned by the person"; "A vendee under a contract for deed to real property"; a domestic or foreign corporation, a real estate investment trust and a person buying securities on credit from a registered broker or dealer; and a person borrowing for business or agricultural purposes, or above the threshold amount for personal, family or household purposes. The threshold amount is not a figure Iowa sets for itself: it "means the threshold amount, as determined by 12 C.F.R. §1026.3(b), in effect during the period the consumer credit transaction was entered into" (§ 537.1301(47)). Charging more than the chapter allows is prohibited (§ 535.4), and the penalty is a forfeiture of eight cents on the hundred by the year on the principal remaining unpaid at judgment, with judgment for the plaintiff for the principal without costs and for the state for the forfeiture (§ 535.5).
The trap
The exemption list is where most commercial lending lands, and the statute drafts it as a bar rather than a defence: an exempt borrower who signed cannot plead or interpose usury at all, and the lender is not subject to any penalty or forfeiture for agreeing to receive or receiving the interest. Section 535.2(2)(b)(6) goes further and makes the subsection supersede interest-rate and finance-charge limitations elsewhere in the Code for those transactions, naming chapters 321, 322, 524, 533, 536A and 537. Timing is the other trap in the borrower's favour: a rate lawful when the agreement was made "shall ... remain lawful during the entire term of the agreement, including any extensions or renewals thereof, for all money due or to become due thereunder including future advances" (§ 535.2(3)(b)), so the floating ceiling is tested at contracting rather than month by month. This rule does not address federal preemption, and does not state the rate rules of Iowa's banking, credit union, industrial loan or consumer credit chapters. Whether a loan is in the exempt class is decided by rules the section states. A business purpose "includes but is not limited to a commercial, service, or industrial enterprise carried on for profit and an investment activity", and under § 535.2(2)(b) "The purpose for which money is borrowed is the purpose to which a majority of the loan proceeds are applied or are designated in the agreement to be applied." Refinancing proceeds take the purposes of the loan they repay. There is also a drafting trap inside the subsection the ceiling comes from. A note that can escalate must also be able to come back down: an agreement at a rate permitted by subsection 3 "which contains any provisions providing for an increase in the rate of interest prescribed therein shall, if such increase could be to a rate which would have been unlawful at the time the agreement was made, also provide for a reduction in the rate of interest prescribed therein, to be determined in the same manner and with the same frequency as any increase so provided for" (§ 535.2(3)(d)).
16 authorities
- statuteIowa Code § 535.2enactment date not established
The words that state the rule
The maximum lawful rate of interest which may be provided for in any written agreement for the payment of interest entered into during any calendar month commencing on or after April 13, 1979, shall be two percentage points above the monthly average ten-year constant maturity interest rate of United States government notes and bonds as published by the board of governors of the federal reserve system for the calendar month second preceding the month during which the maximum rate based thereon will be effective, rounded to the nearest one-fourth of one percent per year.
- statuteIowa Code § 535.2enactment date not established
The words that state the rule
The following persons may agree in writing to pay any rate of interest, and a person so agreeing in writing shall not plead or interpose the claim or defense of usury in any action or proceeding, and the person agreeing to receive the interest is not subject to any penalty or forfeiture for agreeing to receive or for receiving the interest:
- statuteIowa Code § 535.2enactment date not established
The words that state the rule
(5) A person borrowing money or obtaining credit for business or agricultural purposes, or a person borrowing money or obtaining credit in an amount which exceeds the threshold amount, as defined in section 537.1301, for personal, family, or household purposes.
- statuteIowa Code § 535.2enactment date not established
The words that state the rule
Any rate of interest specified in any written agreement providing for the payment of interest shall, if such rate was lawful at the time the agreement was made, remain lawful during the entire term of the agreement, including any extensions or renewals thereof, for all money due or to become due thereunder including future advances, if any.
- statuteIowa Code § 535.2enactment date not established
The words that state the rule
With respect to any transaction referred to in paragraph “a” of this subsection, this subsection supersedes any interest-rate or finance-charge limitations contained in the Code, including but not limited to this chapter and chapters 321, 322, 524, 533, 536A, and 537.
- statuteIowa Code § 535.4enactment date not established
The words that state the rule
No person shall, directly or indirectly, receive in money or in any other thing, or in any manner, any greater sum or value for the loan of money, or upon contract founded upon any sale or loan of real or personal property, than is in this chapter prescribed.
- statuteIowa Code § 535.5enactment date not established
The words that state the rule
If it is ascertained in an action brought on a contract that a rate of interest has been contracted for, directly or indirectly, in money or in property, greater than is authorized by this chapter, the rate shall work a forfeiture of eight cents on the hundred by the year upon the amount of the principal remaining unpaid upon the contract at the time judgment is rendered, and the court shall enter final judgment in favor of the plaintiff and against the defendant for the principal sum remaining unpaid without costs, and also against the defendant and in favor of the state, to be paid to the treasurer of state for deposit in the general fund of the state, for the amount of the forfeiture. If unlawful interest is contracted for the plaintiff shall not have judgment for more than the principal sum, whether the unlawful interest is incorporated with the principal or not.
- statuteIowa Code § 535.2enactment date not established
The words that state the rule
Except as provided in subsection 2, the rate of interest shall be five cents on the hundred by the year in the following cases, unless the parties shall agree in writing for the payment of interest at a rate not exceeding the rate permitted by subsection 3: a. Money due by express contract. b. Money after the same becomes due. c. Money loaned. d. Money received to the use of another and retained beyond a reasonable time, without the owner’s consent, express or implied. e. Money due on the settlement of accounts from the day the balance is ascertained. f. Money due upon open accounts after six months from the date of the last item. g. Money due, or to become due, where there is a contract to pay interest, and no rate is stipulated.
- statuteIowa Code § 535.2enactment date not established
The words that state the rule
On or before the twentieth day of each month the superintendent of banking shall determine the maximum lawful rate of interest for the following calendar month as prescribed herein, and shall cause this rate to be published, as a notice in the Iowa administrative bulletin or as a legal notice in a newspaper of general circulation published in Polk county, prior to the first day of the following calendar month. This maximum lawful rate of interest shall be effective on the first day of the calendar month following publication. The determination of the maximum lawful rate of interest by the superintendent of banking shall be exempt from the provisions of chapter 17A.
- statuteIowa Code § 535.2enactment date not established
The words that state the rule
(1) A person borrowing money for the purpose of acquiring real property or refinancing a contract for deed.
- statuteIowa Code § 535.2enactment date not established
The words that state the rule
(4) A domestic or foreign corporation, and a real estate investment trust as defined in section 856 of the Internal Revenue Code, and a person purchasing securities as defined in chapter 502 on credit from a broker or dealer registered or licensed under chapter 502 or under the federal Securities Exchange Act of 1934, 15 U.S.C. §78a et seq., as amended.
- statuteIowa Code § 535.2enactment date not established
The words that state the rule
(2) A person borrowing money or obtaining credit in an amount which exceeds the threshold amount as defined in section 537.1301, exclusive of interest, for the purpose of constructing improvements on real property, whether or not the real property is owned by the person. (3) A vendee under a contract for deed to real property.
- statuteIowa Code § 535.2enactment date not established
The words that state the rule
As used in this paragraph, “agricultural purpose” means as defined in section 535.13, and “business purpose” includes but is not limited to a commercial, service, or industrial enterprise carried on for profit and an investment activity.
- statuteIowa Code § 535.2enactment date not established
The words that state the rule
In determining exemptions under this subsection, the rules of construction stated in this paragraph apply: (1) The purpose for which money is borrowed is the purpose to which a majority of the loan proceeds are applied or are designated in the agreement to be applied. (2) Loan proceeds used to refinance or pay a prior loan owed by the same borrower are applied for the same purposes and in the same proportion as the original principal of the loan that is refinanced or paid.
- statuteIowa Code § 535.2enactment date not established
The words that state the rule
Any contract, note or other written agreement providing for the payment of a rate of interest permitted by this subsection which contains any provisions providing for an increase in the rate of interest prescribed therein shall, if such increase could be to a rate which would have been unlawful at the time the agreement was made, also provide for a reduction in the rate of interest prescribed therein, to be determined in the same manner and with the same frequency as any increase so provided for.
- statuteIowa Code § 537.1301enactment date not established
The words that state the rule
“Threshold amount” means the threshold amount, as determined by 12 C.F.R. §1026.3(b), in effect during the period the consumer credit transaction was entered into.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.