Is the interest rate in this Virginia loan lawful, and what happens if it is not?
Twelve percent is the ceiling unless another statute permits more, and exceeding it is drastic: "Except as otherwise permitted by law, no contract shall be made for the payment of interest on a loan at a rate that exceeds 12 percent per year" (Va. Code § 6.2-303(A)), and "Any contract made in violation of this section is void and no person shall have the right to collect, receive, or retain any principal, interest, fees, or other charges in connection with the contract" (§ 6.2-303(F)). The older remedy section says something different and milder: "Any borrower may plead in general terms that the contract on which the action is brought was for the payment of interest greater than is allowed by statute. If the court determines that the contract is usurious, judgment shall be rendered only for the principal sum" (§ 6.2-304). Prospective waiver is barred: "Any agreement or contract in which the borrower waives the benefits of this chapter or releases any rights he may have acquired under this chapter shall be deemed to be against public policy and void", but a post-loan settlement release is not: "The provisions of subsection A shall not apply to a waiver of benefits or release of rights made subsequent to a loan as part of a settlement of potential or pending claims by a borrower involving such loan" (§ 6.2-306). Two exemptions carry most commercial lending out of the chapter altogether. No corporation, qualifying partnership, limited liability company, business trust, or "joint venture organized for the purpose of holding, developing, and managing real estate for profit" may "by way of defense or otherwise, avail itself of any of the provisions of this chapter or any other statutory or case law relating to usury or compounding of interest to avoid or defeat the payment of any interest or any other sum that it has contracted to pay" (§ 6.2-308(A)); and no person may do so "in connection with a loan made to a person for business or investment purposes, if the initial amount of the loan is $5,000 or more" (§ 6.2-317(B)) and the party invoking an exemption carries the burden of bringing the transaction within it. Proof: "Usury, when pleaded, must be shown by clear and cogent proof, but the introduction in evidence of a contract expressly providing for a greater rate of interest than the law allows will establish a prima facie case", and "In determining whether a transaction is usurious, the court has both the right and the duty to probe behind the written instruments and to examine all facts and circumstances which shed light on the true nature of the transaction" (Radford). The borrower's affirmative remedy is in § 6.2-305: one who has paid interest above the permitted rate may sue within two years of the earlier of the last scheduled payment or payment in full for the excess, "Twice the total amount of interest paid to such person during the two years immediately preceding the date of the filing of the action", and court costs and reasonable attorney fees, but a creditor who proves a bona fide error in computation returns only the excess.
The trap
Two Virginia-specific things to hold in mind. First, §§ 6.2-303(F) and 6.2-304 give different consequences for the same wrong, and no published Virginia appellate decision reconciles them: subsection F (the section's amendment credits list 2020 amendments but do not show which one added it) voids the contract and bars recovery of PRINCIPAL as well as interest, while § 6.2-304, unchanged since the 2010 recodification, says judgment "shall be rendered only for the principal sum". Which one a court applies to a given loan is not answered by any published authority we could verify: the only treatment we hold is unpublished (see notes). Second, the exemptions are drawn by BORROWER and by PURPOSE, not by rate: a corporate borrower cannot plead usury at all, and for the $5,000 business-purpose exemption "A loan shall be deemed to be for business or investment purposes if it is not for personal, family, or household purposes", with those purposes expressly not including "a passive or active investment". Section 6.2-303(C) then closes the loop: "In the case of any loan upon which a person is not permitted to plead usury, interest and other charges may be imposed and collected as agreed by the parties." And a choice-of-law clause can take the loan out of Virginia usury law entirely: that is what happened in Settlement Funding v. Von Neumann-Lillie, where the Supreme Court of Virginia held the circuit court erred in refusing to apply Utah law, counsel's statement plus a post-hearing memorandum citing Utah Code § 70C-7-106 "provided the circuit court with sufficient information", and reversed in part the usury judgment, damages, costs and fees, and remanded. The chapter also says what enforcing a loan as agreed does NOT settle: “Any provision of this chapter that provides that a loan or extension of credit may be enforced as agreed in the contract of indebtedness, shall not be construed to preclude the charging or collecting of other loan fees and charges permitted by law, in addition to the stated interest rate.” So the rate ceiling is not the whole price question; fees and charges permitted elsewhere ride on top of the stated rate and are not measured against it by this sentence. Three more things the section itself says. The 12 percent cap's own exception clause has content: § 6.2-303(B) lists, "without limitation", the laws that permit more (Article 4 of the chapter, consumer finance companies, short-term loans, motor vehicle title lenders, the Housing Development Authority, insurance agents, premium finance companies, pawnbrokers, third-party tax payment agreements), so most regulated lending never meets the cap at all. Subsection (E) reaches "any person who seeks to evade its application by any device, subterfuge, or pretense whatsoever", including disguised sales of goods or services and loans routed through a third person, which is the statutory basis for Radford's duty to probe behind the instruments. And since July 1, 2024, subsection (G) treats a cash advance against an expected inheritance as a loan, with everything paid above the advance as interest.
23 authorities
- statuteVa. Code § 6.2-303enactment date not established
The words that state the rule
Except as otherwise permitted by law, no contract shall be made for the payment of interest on a loan at a rate that exceeds 12 percent per year.
- statuteVa. Code § 6.2-303enactment date not established
The words that state the rule
Any contract made in violation of this section is void and no person shall have the right to collect, receive, or retain any principal, interest, fees, or other charges in connection with the contract.
- statuteVa. Code § 6.2-304enactment date not established
The words that state the rule
Any borrower may plead in general terms that the contract on which the action is brought was for the payment of interest greater than is allowed by statute. If the court determines that the contract is usurious, judgment shall be rendered only for the principal sum.
- statuteVa. Code § 6.2-306enactment date not established
The words that state the rule
Any agreement or contract in which the borrower waives the benefits of this chapter or releases any rights he may have acquired under this chapter shall be deemed to be against public policy and void.
- statuteVa. Code § 6.2-306enactment date not established
The words that state the rule
The provisions of subsection A shall not apply to a waiver of benefits or release of rights made subsequent to a loan as part of a settlement of potential or pending claims by a borrower involving such loan.
- statuteVa. Code § 6.2-308enactment date not established
The words that state the rule
No (i) corporation, (ii) partnership that is required to file a certificate pursuant to Chapter 2.1 (§ 50-73.1 et seq.) of Title 50 or was required to file a certificate pursuant to former Chapter 2 (§ 50-44 et seq.) or Chapter 3 (§ 50-74 et seq.) of Title 50 or that is formed under laws other than those of the Commonwealth, (iii) limited liability company, (iv) business trust, or (v) joint venture organized for the purpose of holding, developing, and managing real estate for profit, shall, by way of defense or otherwise, avail itself of any of the provisions of this chapter or any other statutory or case law relating to usury or compounding of interest to avoid or defeat the payment of any interest or any other sum that it has contracted to pay.
- statuteVa. Code § 6.2-317enactment date not established
The words that state the rule
A. For purposes of this section: 1. A loan shall be deemed to be for business or investment purposes if it is not for personal, family, or household purposes; and 2. Personal, family, or household purposes do not include a passive or active investment. B. No person shall, by way of defense or otherwise, avail himself of the provisions of this chapter, or any other statutory or case law relating to usury or compounding of interest, to avoid or defeat the payment of interest, or any other sum, in connection with a loan made to a person for business or investment purposes, if the initial amount of the loan is $5,000 or more.
- case226 Va. 596Radford v. Community Mortgage & Investment Corp.Va.decided 1984read it at the source ↗
The words that state the rule
Usury, when pleaded, must be shown by clear and cogent proof, but the introduction in evidence of a contract expressly providing for a greater rate of interest than the law allows will establish a prima facie case. See Chakales v. Djiovanides, 161 Va. 48 , 170 S.E. 848 (1933). Thereupon, the burden shifts to the opposing party to go forward with evidence which would bring the transaction within an exception to the usury laws, or to show some other valid reason to avoid their application.
- case226 Va. 596Radford v. Community Mortgage & Investment Corp.Va.decided 1984read it at the source ↗
The words that state the rule
In determining whether a transaction is usurious, the court has both the right and the duty to probe behind the written instruments and to examine all facts and circumstances which shed light on the true nature of the transaction.
The words that state the rule
If a contract specifies that the substantive law of another jurisdiction governs its interpretation or application, the parties' choice of substantive law should be applied.
- statuteVa. Code § 6.2-303enactment date not established
The words that state the rule
Any provision of this chapter that provides that a loan or extension of credit may be enforced as agreed in the contract of indebtedness, shall not be construed to preclude the charging or collecting of other loan fees and charges permitted by law, in addition to the stated interest rate. Such other loan fees and charges need not be included in the rate of interest stated in the contract of indebtedness.
- statuteVa. Code § 6.2-305enactment date not established
The words that state the rule
A. If interest in excess of that permitted by an applicable statute is paid upon any loan, the person paying may bring an action within two years from the first to occur of: (i) the date of the last scheduled loan payment or (ii) the date of payment of the loan in full, to recover from the person taking or receiving such payments: 1. The total amount of the interest paid to such person in excess of that permitted by the applicable statute; 2. Twice the total amount of interest paid to such person during the two years immediately preceding the date of the filing of the action; and 3. Court costs and reasonable attorney fees.
- statuteVa. Code § 6.2-305enactment date not established
The words that state the rule
C. Any creditor who proves that interest or other charges in excess of those permitted by law were imposed or collected as a result of a bona fide error in computation or similar mistake shall not be liable for the penalties prescribed in this section. In such event, the creditor shall only be liable to return to the borrower the amount of interest or other charges collected in excess of the amount permitted by applicable statute.
- statuteVa. Code § 6.2-303enactment date not established
The words that state the rule
B. Laws that permit payment of interest at a rate that exceeds 12 percent per year are set out, without limitation, in: 1. Article 4 (§ 6.2-309 et seq.) of this chapter; 2. Chapter 15 (§ 6.2-1500 et seq.), relating to powers of consumer finance companies; 3. Chapter 18 (§ 6.2-1800 et seq.), relating to short-term loans; 4. Chapter 22 (§ 6.2-2200 et seq.), relating to interest chargeable by motor vehicle title lenders; 5. Section 36-55.31 , relating to loans by the Virginia Housing Development Authority; 6. Section 38.2-1806 , relating to interest chargeable by insurance agents; 7. Chapter 47 (§ 38.2-4700 et seq.) of Title 38.2, relating to interest chargeable by premium finance companies; 8. Section 54.1-4008 , relating to interest chargeable by pawnbrokers; and 9. Section 58.1-3018 , relating to interest and origination fees payable under third-party tax payment agreements.
- statuteVa. Code § 6.2-303enactment date not established
The words that state the rule
E. The provisions of subsection A shall apply to any person who seeks to evade its application by any device, subterfuge, or pretense whatsoever, including: 1. The loan, forbearance, use, or sale of (i) credit, as guarantor, surety, endorser, comaker, or otherwise; (ii) money; (iii) goods; or (iv) things in action; 2. The use of collateral or related sales or purchases of goods or services, or agreements to sell or purchase, whether real or pretended; receiving or charging compensation for goods or services, whether or not sold, delivered, or provided; and 3. The real or pretended negotiation, arrangement, or procurement of a loan through any use or activity of a third person, whether real or fictitious.
- statuteVa. Code § 6.2-303enactment date not established
The words that state the rule
G. Any contract entered into on or after July 1, 2024, pursuant to which a person receives a cash advance for assigning to a company or other entity a portion of such person's rights to receive inheritance funds from a will that has been, or is anticipated to be, offered for probate in a circuit court of the Commonwealth shall be considered a loan. Any funds such person is obligated to pay under the terms of such contract in addition to the total of the cash advance shall be considered interest. Such contract shall be subject to the provisions of subsection A.
- statuteVa. Code § 6.2-303enactment date not established
The words that state the rule
C. In the case of any loan upon which a person is not permitted to plead usury, interest and other charges may be imposed and collected as agreed by the parties.
- statuteVa. Code § 6.2-308enactment date not established
The words that state the rule
B. Nothing contained in this chapter or any other statutory or case law relating to usury or compounding of interest shall be construed to prevent the recovery of interest or any other sum that an entity described in subsection A has contracted to pay, regardless of whether it is more than the contract rate of interest and the fact appears on the face of the contract.
- statuteVa. Code § 6.2-305enactment date not established
The words that state the rule
B. If the sale of property in which an interest has been conveyed to secure the payment of the debt is scheduled or anticipated, an injunction may be granted to prevent such sale pending the completion of an action brought pursuant to subsection A.
- case226 Va. 596Radford v. Community Mortgage & Investment Corp.Va.decided 1984read it at the source ↗
The words that state the rule
Since the usury laws must be liberally construed, it follows that exemptions therefrom must be strictly construed, in order to “advance the remedy and suppress the mischief.”
- case226 Va. 596Radford v. Community Mortgage & Investment Corp.Va.decided 1984read it at the source ↗
The words that state the rule
The lender thus failed to overcome the Radfords’ prima facie showing of usury.
The words that state the rule
These citations to Utah law provided the circuit court with sufficient information regarding the substance of Utah law. See also Code § 8.01-386. Therefore, the circuit court erred in refusing to apply Utah law in the construction of the loan agreement.
The words that state the rule
Accordingly, we will reverse those portions of the judgments of the circuit court entering judgment in favor of Lillie based on her claim of usury under Code § 6.1-330.57 and awarding her damages, costs and attorneys' fees under that statute and remand the case for further proceedings. Reversed in part, and remanded.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.