What is the exposure if this agreement's interest rate turns out to be over the limit?
It differs by transaction type, and liability attaches on CONTRACTING for the interest, not only on receiving it. A creditor who contracts for, charges, or receives interest greater than the amount authorized by the subtitle in connection with a transaction for personal, family or household use is liable to the obligor for the GREATER of (1) three times the amount by which the interest contracted for, charged or received exceeds the amount allowed by law, or (2) $2,000 or 20 percent of the principal, whichever is LESS. For a commercial transaction, the creditor is liable for three times the excess interest, and the verb set is narrower there: (a-1) reaches a creditor who contracts for or receives, but not one who merely charges. The chapter's penalties are the only penalties for an excessive rate (common-law penalties do not apply (§ 305.007)), and a consumer-transaction rate above twice the authorized amount is also a misdemeanor, each contract a separate offense (§ 305.008). Two more tiers sit beside that: a creditor who charges AND receives more than TWICE the authorized rate on a consumer transaction also forfeits the principal and all interest and other amounts charged and received (§ 305.002); and a creditor who charges more than the contract rate but not more than the legal maximum is not subject to usury penalties at all (§ 305.001(c)).
The trap
The consumer formula is a greater-of wrapped around a lesser-of and is routinely misread in both directions. The more important drafting point is the verb: the statute reaches a creditor who CONTRACTS FOR usurious interest, so exposure can exist on the face of the document before a dollar is collected, which is the usual reason parties add a usury savings clause (a drafting convention, not something § 305.001 provides for). But the chapter carries several safety valves. One is substantive: a creditor is not subject to penalty for usurious interest that results from an accidental and bona fide error (§ 305.101); correction by any one of several creditors in a single transaction protects them all (§ 305.104); and interest received under a final, unappealable judgment is not a violation (§ 305.105). The rest are procedural: an obligor who files suit must give the creditor written notice stating the violation not later than the 61st day before filing; a defendant raising usury as a counterclaim instead gives it at the time of filing, and on the creditor's application the action abates 60 days during which the creditor may correct, but only by also offering to pay the obligor's reasonable attorney's fees for work done before the abatement (§ 305.006(d)). 'Actually discovered' means discovery in fact, not what a prudent person should have discovered, and notice is given when delivered personally, by telecopier or by mail to the address in the most recent transaction documents (§ 305.103(b)-(c)), and a creditor who corrects the violation as § 305.103 provides within 60 days of that notice is not liable for it (§ 305.006(b)-(c)); independently, a creditor who corrects within 60 days of ACTUALLY discovering a violation, and notifies the obligor first, is not liable (§ 305.103(a)). So the first question after spotting usurious paper is whether the cure window is still open, not what the treble is. Two more terms sit in the same sections: an action 'must be brought within four years after the date on which the usurious interest was contracted for, charged, or received', and § 305.006(a) also fixes venue to one of five listed counties; and a creditor liable under § 305.001 or § 305.003 'is also liable to the obligor for reasonable attorney's fees set by the court' (§ 305.005). The maximum authorized rates themselves live in other chapters of the subtitle, which were not read here, so this rule tells you the consequence, not the ceiling.
10 authorities
- statuteTex. Fin. Code § 305.001enacted 2005-09-01
The words that state the rule
(a) A creditor who contracts for, charges, or receives interest that is greater than the amount authorized by this subtitle in connection with a transaction for personal, family, or household use is liable to the obligor for an amount that is equal to the greater of: (1) three times the amount computed by subtracting the amount of interest allowed by law from the total amount of interest contracted for, charged, or received; or (2) $2,000 or 20 percent of the amount of the principal, whichever is less. (a-1) A creditor who contracts for or receives interest that is greater than the amount authorized by this subtitle in connection with a commercial transaction is liable to the obligor for an amount that is equal to three times the amount computed by subtracting the amount of interest allowed by law from the total amount of interest contracted for or received. (b) This section applies only to a contract or transaction subject to this subtitle. (c) A creditor who charges or receives interest in excess of the amount contracted for, but not in excess of the maximum amount authorized by law, is not subject to penalties for usurious interest but may be liable for other remedies and relief as provided by law.
- statuteTex. Fin. Code § 305.002enacted 2005-09-01
The words that state the rule
(a) In addition to the amount determined under Section 305.001 , a creditor who charges and receives interest that is greater than twice the amount authorized by this subtitle is liable to the obligor for: (1) the principal amount on which the interest is charged and received; and (2) the interest and all other amounts charged and received. (b) This section applies only to a contract or transaction for personal, family, or household use subject to this subtitle.
- statuteTex. Fin. Code § 305.006enacted 2005-09-01
The words that state the rule
(a) An action under this chapter must be brought within four years after the date on which the usurious interest was contracted for, charged, or received. The action must be brought in the county in which: (1) the transaction was entered into; (2) the usurious interest was charged or received; (3) the creditor resides at the time of the cause of action, if the creditor is an individual; (4) the creditor maintains its principal office, if the creditor is not an individual; or (5) the obligor resides at the time of the accrual of the cause of action. (b) Not later than the 61st day before the date an obligor files a suit seeking penalties for a transaction in which a creditor has contracted for, charged, or received usurious interest, the obligor shall give the creditor written notice stating in reasonable detail the nature and amount of the violation. (c) A creditor who receives a notice under this section may correct the violation as provided by Section 305.103 during the period beginning on the date the notice is received and ending on the 60th day after that date. A creditor who corrects a violation as provided by this section is not liable to an obligor for the violation. (d) With respect to a defendant filing a counterclaim action alleging usurious interest in an original action by the creditor, the defendant shall provide notice complying with Subsection (b) at the time of filing the counterclaim and, on application of the creditor to the court, the action is subject to abatement for a period of 60 days from the date of the court order. During the abatement period the creditor may correct a violation. As part of the correction of the violation, the creditor shall offer to pay the obligor's reasonable attorney's fees as determined by the court based on the hours reasonably expended by the obligor's counsel with regard to the alleged violation before the abatement. A creditor who corrects a violation as provided by this subsection is not liable to an obligor for the violation.
- statuteTex. Fin. Code § 305.103enacted 1999-09-01
The words that state the rule
(a) A creditor is not liable to an obligor for a violation of this subtitle if: (1) not later than the 60th day after the date the creditor actually discovered the violation, the creditor corrects the violation as to that obligor by taking any necessary action and making any necessary adjustment, including the payment of interest on a refund, if any, at the applicable rate provided for in the contract of the parties; and (2) the creditor gives written notice to the obligor of the violation before the obligor gives written notice of the violation or files an action alleging the violation. (b) For the purposes of Subsection (a), a violation is actually discovered at the time of the discovery of the violation in fact and not at the time when an ordinarily prudent person, through reasonable diligence, could or should have discovered or known of the violation. Actual discovery of a violation in one transaction may constitute actual discovery of the same violation in other transactions if the violation is of such a nature that it would necessarily be repeated and would be clearly apparent in the other transactions without the necessity of examining all the other transactions. (c) For purposes of Subsection (a), written notice is given when the notice is delivered to the person or to the person's authorized agent or attorney of record personally, by telecopier, or by United States mail to the address shown on the most recent documents in the transaction. Deposit of the notice as registered or certified mail in a postage paid, properly addressed wrapper in a post office or official depository under the care and custody of the United States Postal Service is prima facie evidence of the delivery of the notice to the person to whom the notice is addressed.
- statuteTex. Fin. Code § 305.005enacted 1999-09-01
The words that state the rule
A creditor who is liable under Section 305.001 or 305.003 is also liable to the obligor for reasonable attorney's fees set by the court.
- statuteTex. Fin. Code § 305.101enacted 1999-09-01
The words that state the rule
A creditor is not subject to penalty under this chapter for any usurious interest that results from an accidental and bona fide error.
- statuteTex. Fin. Code § 305.104enacted 1999-09-01
The words that state the rule
If in a single transaction more than one creditor may be liable for a violation of this subtitle, compliance with Section 305.103 by any of those creditors entitles each to the same protection provided by that section.
- statuteTex. Fin. Code § 305.105enacted 1999-09-01
The words that state the rule
A creditor is not liable to an obligor for a violation of this subtitle if the creditor receives interest that has been awarded pursuant to a final judgment that is no longer subject to modification or reversal.
- statuteTex. Fin. Code § 305.007enacted 1999-09-01
The words that state the rule
The penalties provided by this chapter are the only penalties for violation of this subtitle for contracting for, charging, or receiving interest in an amount that produces a rate in excess of the maximum rate allowed by law. Common law penalties do not apply.
- statuteTex. Fin. Code § 305.008enacted 1999-09-01
The words that state the rule
(a) A person commits an offense if the person contracts for, charges, or receives interest on a transaction for personal, family, or household use that is greater than twice the amount authorized by this subtitle. (b) An offense under this section is a misdemeanor punishable by a fine of not more than $1,000. (c) Each contract or transaction that violates this section is a separate offense. (d) This section applies only to a contract or transaction subject to this subtitle.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.