This post is going to be a Spanish one. A while back, Angie Littwin reminded us about the importance of the U.S. Supreme Court decision in Marquette vs. First Omaha Service Corp. on usury law, a decision Bob told me before when he was in Madrid. I thought it would be interesting to show how our Spanish usury law works. I should confess that this is the part of the course I typically skip in my classes, thinking that our law, dating from 1908 (here it is usually known as "Ley Azcárate") was one of those useless ancient rules. I was very reckless as I found later. Contrary to what I thought, it is frequently applied in our courts, and every year there are several cases involving its application in the appellate courts (Audiencias Provinciales) and in our Supreme Court. Our Spanish example could be of interest, mainly for how the scope of application is defined, in a very broad way that makes it a powerful instrument in the hands of the courts. I would change the quiz today, for a spoonful of sugar to help this medicine of my own country’s situation go down.

The purpose of the law is crystal clear: avoid usury. And the solution is very powerful: the nullity of the contract and the loss of any interest for the creditor, as the debtor must only give back what was received (as a natural consequence of the nullity of the contract, of course, see an alternative solution in France, here, article L313-4). To get to that result, the contract should be usurious or "leonino" (i.e. onerous in such a manner that the debtor agreed just because of the distressing circumstances, lack of expertise or limited mental capacities).

The first obvious thing is that "usurious" word. How should we define it? In my opinion, the answer shouldn’t be a figure, as it depends on the moment and mainly on the common interest rates when the loan was given. From that point, our law ties the concept of usury to a very open concept, leaving in the hands of the court the decision of whether there is a usurious loan.

There is usury, following the text of the statute, whenever the interest rate is "clearly higher than the money legal interest and clearly disproportionate according to the circumstances." That it is open to the judge’s discretion is constantly repeated in our Supreme Courts decisions. It is the reason why higher (even much higher) interest rates (around 20% or 30%) are not necessarily usurious and, on the other hand, interest rates of less than 18% (in a loan dating back to 1979) were considered to be usurious.

This freedom to decide is very important when the law does not limit the scope of application to consumers, as it is the case of Spanish law. When the situation is different, maybe a defined margin referenced to the usual interbank exchange rates would be preferable (once again, have a look on the French position, here, art. L313-3). The relevance of the lender’s situation and circumstances of the debtor is even greater when analyzing if the contract was really onerous (as defined a few lines above), as it is a concept strictly tied to the debtor’s situation. I should be clear that the Supreme Court considers that the stressing circumstances of being unable to pay the money back are not enough to qualify the credit concession as onerous, as they are always present. The courts are much less likely to find the loan usurious when the debtor used the loan for business purposes, as it should be.

I also would like to point how broadly the scope of application is defined regarding the operations themselves. It is obvious that when we say usury, we are primarily thinking of loans. But, at the same time, it is also obvious that a lender can get to the same economic result using alternative contracts or operations. So, let’s say, instead of giving a loan, buying the house of the debtor for the prize of the loan, letting him or her stay and receiving the loan plus interests in the form of a rent, inserting into the contract of sale a repurchase clause. In fact, this operation seems very common if we have a look on the courts’ decisions (if you understand Spanish, take a look on this) and the usury law could be useless if it was not affected. Our law solves the problem with a provision extending law to "any operation essentially equivalent to a money loan" (art. 9). I think it is a great idea for a usury law and, taking into account when it was passed, really advanced for that time. On the other hand, its application puts a lot of problems (like, for instance, whether a leasing should be considered one of those equivalent operations).

As I said at the beginning of this post, our law of 1908 is still alive and, to be honest, it seems that it is going to have a second youth. The reason is the emerging market of fast credit. There are a lot of financial companies offering credit products to compete with credit cards for small amounts of credit that must be paid back in a more or less short period of time (let’s say less than 6000€ and 60 months). These are typically consumer credit and their interest rates are around 22-25%. As personal credits in traditional banks are around 7-8%, it is unclear whether a judge would consider usurious these new forms of credit. The industry says that they are playing in a different league and the reference should not be the personal credit, but the interest rates of revolving credit cards, which are between 13% and 22%. The answer remembers me the one my kids use to give when they are fighting: "She started it!" The judge’s position would then be very similar to the parent’s situation: should I punish both of them? To be honest, I must say that it isn’t very clear for me whether the conditions for the application of our usury law will meet in the consumer credit market, which has very stringent disclosure obligations.

If this post stressed you a little bit, try to relax with this canonical musical moment. Next: consumer bankruptcy in Europe…