Is the interest rate in this North Carolina loan lawful, and can the borrower raise usury?
It depends first on whether the loan is exempt, and most business loans are. N.C.G.S. § 24-9(a)(3) defines an 'exempt loan' as one in which the loan amount is three hundred thousand dollars or more, OR the borrower is a person other than a natural person, OR the loan is obtained by a natural person primarily for a purpose other than a personal, family or household purpose, and the same subdivision adds that whether a loan is obtained primarily for a non-consumer purpose 'shall be guided by the standards established by the federal Truth In Lending Act' and the regulations and rulings issued under it. For such a loan § 24-9(b) provides that, notwithstanding any other provision of the Chapter or of State law, the borrower may agree to pay and the lender may charge and collect interest at any rate and fees and other charges in any amount that the borrower agrees to pay, and 'a claim or defense of usury is prohibited in an exempt loan transaction'. Outside the exemption, § 24-1.1(a) (which permits a contract rate only 'except as otherwise provided in this Chapter or other applicable law') lets the parties to a loan, purchase money loan, advance, commitment for a loan or forbearance, other than a credit card, open-end or similar loan, contract in writing for interest not in excess of the rate set under subsection (c) where the principal is twenty-five thousand dollars or less, and any rate agreed upon where the principal is more than twenty-five thousand dollars. The remedy, where usury applies, is in § 24-2: knowingly taking, receiving, reserving or charging a greater rate than permitted forfeits the ENTIRE interest the note carries, and a person who has paid a greater rate may recover back twice the amount of interest paid.
The trap
The order of the questions is the trap, and § 24-1.1(a)'s own opening is why: it permits the written contract rate only 'except as otherwise provided in this Chapter or other applicable law', and § 24-9 is exactly such other provision. Because § 24-9(b) (which opens 'notwithstanding any other provision of this Chapter or any other provision of State law') prohibits the claim or defense of usury outright in an exempt loan, a corporate or LLC borrower, a 'person other than a natural person', has no usury defense at all, whatever the rate and whatever the size of the loan; so does any borrower on a loan of $300,000 or more, and any natural person borrowing primarily for a non-consumer purpose, which § 24-9(a)(3) says is to be 'guided by the standards established by the federal Truth In Lending Act'. The $25,000 figure in § 24-1.1(a) is not a rate: below it the ceiling is the rate the Commissioner of Banks announces on the fifteenth of each month under subsection (c), the latest published noncompetitive six-month U.S. Treasury bill rate plus six percent, rounded to the nearest half percent, or sixteen percent, whichever is greater. WHICH announced rate governs turns on the kind of rate the parties agreed: the rate announced on the fifteenth is the maximum for loans made during the following calendar month 'when the parties to the loans have agreed that the rate of interest to be charged by the lender and paid by the borrower shall not vary or be adjusted during the term of the loan', while for a loan whose rate may vary the maximum in any month is the greater of the rate announced in the preceding calendar month or in the calendar month before the adjustment. Section 24-1 is a different thing again: its whole operative text is 'except as otherwise provided in G.S. 136-113, the legal rate of interest shall be eight percent (8%) per annum for such time as interest may accrue, and no more', while § 24-1.1(a) separately permits a written contract rate; no North Carolina opinion was read on how the two fit together, so do not treat the eight percent as a contract ceiling on the strength of those two texts alone. One hard ceiling in the Chapter is not a Treasury formula at all: § 24-1.1(e)(3) caps the annual percentage rate at thirty-six percent, inclusive of that subsection's origination fees and the interest permitted by (c), where the principal is under five thousand dollars, the borrower is a natural person and the debt is incurred primarily for personal, family or household purposes; and § 24-1.1(f) says the section 'does not limit fees on loans or extensions of credit in excess of three hundred thousand dollars ($300,000)'. Two bank carve-outs sit inside § 24-9 itself. Subsection (c) lets a bank charge any agreed rate and fees on a qualifying equity line of credit, but 'an equity line of credit made by a bank shall be subject to the following, to the extent otherwise applicable' (the high-cost home loan provisions of G.S. 24-1.1E and the consumer protections of G.S. 24-10.2, neither of which was read for this question), and it also limits the prepayment fees a bank may charge on the fixed-rate portion of such a line. Subsection (d) lets a bank charge any agreed rate on a revolving credit card plan, but 'this subsection (d) shall not apply to a revolving credit card plan that is secured by a mortgage or deed of trust on real property'. Federal preemption of State rate limits was not read and is not addressed here, and neither were §§ 24-1.1E, 24-10 or 24-10.2. One thing § 24-1.1 does not licence, whatever rate applies: 'Nothing in this section authorizes the charging of interest on committed funds prior to the disbursement of the funds.' A commitment fee is not interest on money that has not gone out the door.
10 authorities
- statuteN.C.G.S. § 24-9enactment date not established
The words that state the rule
"Exempt loan" means a loan in which: a. The loan amount is three hundred thousand dollars ($300,000) or more; or b. The borrower is a person other than a natural person; or c. The loan is obtained by a natural person primarily for a purpose other than a personal, family, or household purpose. Whether a loan is obtained primarily for a purpose other than a personal, family, or household purpose shall be guided by the standards established by the federal Truth In Lending Act (Title 1 of Public Law 90-321; 82 Stat. 146; 15 U.S.C. § 160, et seq.) and all regulations and rulings issued pursuant to that Act, as the same may be amended from time to time.
- statuteN.C.G.S. § 24-9enactment date not established
The words that state the rule
(b) Notwithstanding any other provision of this Chapter or any other provision of State law, any borrower in an exempt loan transaction may agree to pay, and any lender, including a bank, may charge and collect from the borrower, interest at any rate and fees and other charges in any amount that the borrower agrees to pay. A claim or defense of usury is prohibited in an exempt loan transaction.
- statuteN.C.G.S. § 24-9enactment date not established
The words that state the rule
(c) The provisions of G.S. 24-1.2A, 24-11, and 24-11.1 shall not apply to equity lines of credit offered by banks. Except as provided in this subsection and notwithstanding any other provision of this Chapter or any other provision of State law, any bank may charge and collect from any borrower interest at any rate and fees and other charges in any amount that the borrower agrees to pay in connection with an equity line of credit. However, an equity line of credit made by a bank shall be subject to the following, to the extent otherwise applicable: (1) The provisions of G.S. 24-1.1E (relating to restrictions and limitations on high-cost home loans). (2) The provisions of G.S. 24-10.2 (relating to consumer protections in certain home loans).
- statuteN.C.G.S. § 24-9enactment date not established
The words that state the rule
(d) The provisions of G.S. 24-11 and G.S. 24-11.1 shall not apply to revolving credit card plans offered by banks. Notwithstanding any other provision of this Chapter or any other provision of State law, any bank may charge and collect from any borrower interest at any rate, as well as fees and other charges in any amount that the borrower agrees to pay in connection with a revolving credit card plan. This subsection (d) shall not apply to a revolving credit card plan that is secured by a mortgage or deed of trust on real property.
- statuteN.C.G.S. § 24-1.1enactment date not established
The words that state the rule
(a) Except as otherwise provided in this Chapter or other applicable law, the parties to a loan, purchase money loan, advance, commitment for a loan, or forbearance, other than a credit card, open-end, or similar loan, may contract in writing for the payment of interest not in excess of the following: (1) Where the principal amount is twenty-five thousand dollars ($25,000) or less, the rate set under subsection (c) of this section. (2) Any rate agreed upon by the parties where the principal amount is more than twenty-five thousand dollars ($25,000).
- statuteN.C.G.S. § 24-2enactment date not established
The words that state the rule
The taking, receiving, reserving or charging a greater rate of interest than permitted by this chapter or other applicable law, either before or after the interest may accrue, when knowingly done, shall be a forfeiture of the entire interest which the note or other evidence of debt carries with it, or which has been agreed to be paid thereon. And in case a greater rate of interest has been paid, the person or his legal representatives or corporation by whom it has been paid, may recover back twice the amount of interest paid in an action in the nature of action for debt.
- statuteN.C.G.S. § 24-1.1enactment date not established
The words that state the rule
(b) As used in this section, interest shall not be deemed in excess of the rates provided where interest is computed monthly on the outstanding principal balance and is collected not more than 31 days in advance of its due date. Nothing in this section authorizes the charging of interest on committed funds prior to the disbursement of the funds.
- statuteN.C.G.S. § 24-1.1enactment date not established
The words that state the rule
(c) On the fifteenth day of each month, the Commissioner of Banks shall announce and publish the maximum rate of interest permitted by subdivision (1) of subsection (a) of this section on that date. The rate shall be the latest published noncompetitive rate for U.S. Treasury bills with a six-month maturity as of the fifteenth day of the month plus six percent (6%), rounded upward or downward, as the case may be, to the nearest one-half of one percent (1/2 of 1%) or sixteen percent (16%), whichever is greater. If there is no nearest one-half of one percent (1/2 of 1%), the Commissioner shall round downward to the lower one-half of one percent (1/2 of 1%). The rate so announced shall be the maximum rate permitted for the term of loans made under this section during the following calendar month when the parties to the loans have agreed that the rate of interest to be charged by the lender and paid by the borrower shall not vary or be adjusted during the term of the loan. The parties to a loan made under this section may agree to a rate of interest that shall vary or be adjusted during the term of the loan in which case the maximum rate of interest permitted on the loans during a month during the term of the loan shall be the greater of the rate announced by the Commissioner in (i) the preceding calendar month or (ii) the calendar month preceding that in which the rate is varied or adjusted.
- statuteN.C.G.S. § 24-1.1enactment date not established
The words that state the rule
(3) If (i) the loan or extension of credit has a principal amount less than five thousand dollars ($5,000), (ii) the borrower is a natural person, and (iii) the debt is incurred primarily for personal, family, or household purposes, the loan or extension of credit shall not have an annual percentage rate that exceeds thirty-six percent (36%), inclusive of the origination fees permitted by this subsection and the interest permitted by subsection (c) of this section. For purposes of this subsection, "annual percentage rate" shall be calculated in accordance with the federal Consumer Credit Protection Act, Chapter 41 of Title 15 of the United States Code, (Truth in Lending Act) and the regulations adopted under it. (f) This section does not limit fees on loans or extensions of credit in excess of three hundred thousand dollars ($300,000).
- statuteN.C.G.S. § 24-1enactment date not established
The words that state the rule
Except as otherwise provided in G.S. 136-113, the legal rate of interest shall be eight percent (8%) per annum for such time as interest may accrue, and no more.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.