Usury (including Maximum Interest Rate; Choice of Law; Time-Price Differential; and Late Charges)

"Tennessee Statutes are now housed on LexisNexis.

Provisions concerning general interest rates can be found in Tenn. Code Ann. § 47-14.

In, Tenn. Code Ann. § 47-14-102 the ""formula rate"" is defined as:

an annual rate of interest four (4) percentage points above the average prime loan rate (or the average short-term business loan rate, however denominated) for the most recent week for which such an average rate has been published by the board of governors of the Federal Reserve System, or twenty-four percent (24%) per annum, whichever is less; provided, that in the event that the board of governors ceases to publish the average rate, or in the event that the formula rate should be adjudicated or become inapplicable for any reason whatsoever, the formula rate is, and shall remain, twenty-four percent (24%) per annum until the general assembly otherwise provides. If the board of governors fails to publish the average rate for four (4) consecutive weeks, it shall be deemed to have ceased to publish the average rate.

With respect to general interest rates, Tenn. Code Ann. § 47-14-103 provides that:

Except as otherwise expressly provided by this chapter or by other statutes, the maximum effective rates of interest are as follows: (1) For all transactions in which other statutes fix a maximum effective rate of interest for particular categories of creditors, lenders, or transactions, the rate so fixed; (2) For all written contracts, including obligations issued by or on behalf of the state of Tennessee, any county, municipality, or district in the state, or any agency, authority, branch, bureau, commission, corporation, department, or instrumentality thereof, signed by the party to be charged, and not subject to subdivision (1), the applicable formula rate; and (3) For all other transactions, ten percent (10%) per annum.

Regarding choice of laws, Tenn. Code Ann. § 47-14-119 reads:

In any transaction otherwise subject to this chapter which is not subject to the disclosure requirements of the federal Consumer Credit Protection Act, where the transaction bears a reasonable relationship to this state and also to another state or nation, the parties may agree in the written contract evidencing such transaction that the laws of this state or of any other such state or nation shall govern their rights and duties with respect to interest, loan charges, commitment fees, and brokerage commissions.

Tenn. Code Ann. § 47-14-102(11) states that:

“Time-price differential” is the difference, however denominated or expressed, between the amount charged on a sale of property, or a charge for services, for cash and the amount charged if payment were to be deferred or if payment were to be made in future installments; provided, that any difference in such amounts charged with respect to the sale of real property to be owned and occupied by the purchaser as the purchaser's principal place of residence for family residential purposes shall be considered to be interest rather than time-price differential.

Tenn. Code Ann. § 47-14 also includes several other sections relating to usury.

A. Maximum Interest Rate. Simply stated, the Tennessee maximum rate for written contracts (other than those governed by specific statutes and single payment loans for less than $1000 and having a maturity of less than one year) is prime plus four percentage points (4%). The details, however, including the identification of prime, the timing of changes in the maximum rate and the times when the applicable maximum rate may be selected, are all fairly complex. See TCA §§ 47-14-102, -103, -105, -106 and -107. Contact Tennessee counsel of your choice for more information on these topics. If applicable to a given transaction, the maximum rate limits post-default as well as pre-default interest. B. Three Bases for Inapplicability of Usury Limit to Equipment Leases. Any one of the following, if applicable, is sufficient alone to prevent application of Tennessee's usury limit to commercial equipment leases: 1. Choice of Law. Tennessee law is quite favorable to contractual choice of law provisions between commercial parties. Two statutes, TCA § 47-1-105, which is part of the Uniform Commercial Code as enacted in Tennessee, TCA § 47-1-101 through 47-9-709 (the "Tennessee UCC"), and TCA § 47-14-119, which is part of Tennessee's general usury statutes cited above, provide that the parties may select the law of any jurisdictions that bears a reasonable relation to the transaction. Case law strengthens this concept, holding that commercial parties may select the laws of another jurisdiction reasonably related to the transaction even for the purpose of avoiding the application of Tennessee's usury limits, noting that the parties are presumed to have selected the law that will uphold their agreement and that the law that affords the greatest validity to the contract between the parties should be given effect where otherwise logically relevant. See Goodwin Brother Leasing v. H&B Inc., 597 S.W.2d 303 (Tenn. 1980.) Please note, however, that Uniform Commercial Code Article 2A-Leases, as enacted in Tennessee, TCA §§ 47-2A-101 through -532, limits the effectiveness of choice of law provisions in consumer leases as specifically provided in TCA § 47-2A-106. 2. True Leases Not Subject to Usury Limits. Even if Tennessee law is applied in spite of a non-Tennessee choice of law provision, equipment leases will not be subject to Tennessee usury limits if they are true leases. While it is not entirely clear which test or tests would be used to determine what is a true lease for usury purposes, the most likely guidance will be the Tennessee UCC, and specifically the revisions to the Tennessee UCC adopted in connection with the enactment of Article 2A-Leases in Tennessee, cited above. TRAC leases not otherwise constituting security interests are treated as true leases pursuant to TCA § 47-2A-110. Also, TCA § 47-1-201(37), the definition of "security interest" was revised in conjunction with Article 2A-Leases, but it is applicable for all Tennessee UCC purposes. It distinguishes between leases and security interests in subparts (B) through (D). Please note, however, that the usury statutes are not a part of the Tennessee UCC. 3. Conditional Sales Contracts; Time-Price Differential. Leases that do not qualify as true leases are likely to be characterized as conditional sales contracts, to which the concept of time-price differential applies in Tennessee. Perhaps because of Tennessee's relatively strict usury limitations in comparison to other states, especially as applied to commercial transaction (as to which interest rates are unregulated in many states), the concept of time-price differential is alive and well in Tennessee. Under this doctrine, a seller may charge a higher price for property or services if the price is paid over time than if the buyer pays in full at the time of the sale, and the difference in price is considered to be time-price differential and not interest except in the case of the sale of real property to be the purchaser's principal residence. Time-price differential is not subject to the general usury statutes. See TCA § 47-14-102(10). Although it is limited under the Tennessee Retail Installment Sales Act, TCA §§ 47-11-101 through -111, this limitation does not apply to sales of personal property sold for commercial or industrial purposes. See TCA § 47-11-102(2). Section 47-11-110 of this Act does apply more broadly, but only for the purpose of making the lack of regulation clear as to certain transactions, including conditional sales, as follows (with emphasis added): 47-11-110. Transactions do not constitute loans. a. A "retail installment transaction," as defined in § 47-11-102, or any other conditional sales contract or other agreement covering the time sale of personal property or services, and the assignment thereof, and the business of selling such personal property and services on a time payment basis, and the business of purchasing or acquiring such transactions, contracts, or agreements, whether or not regulated under this chapter, shall not be deemed to be loans or forebearances [sic] of money or things of value or the making of same, nor shall they be regulated by or subject to the provisions of title 45, chapter 5, parts 1-4. b. "Personal property" and "services," as used in this section, include all personal property and services, whether or not purchased for commercial or industrial use, and whether or not such personal property is affixed or to be affixed to real property so as to become a part thereof, whether or not severable from such real property. C. Late Charges. Late charges that constitute loan charges are regulated separately from interest, but also under Tennessee's general usury laws. They are not subject to a set limit, however. Instead, they must be fair and reasonable compensation for the detriment caused by the late payment and they must be agreed to in the contract between the parties. See TCA § 47-14-113(d); Bank of Crockett v. Cullipher, 752 S.W.2d 84, 92-92 (Tenn. Ct. App. 1988) (no contractual basis for late charge; charge in this case unconscionable). A similar standard has been applied to other types of contracts. See Wilson v. Dealy, 434 S.W.2d 835 (Tenn. S. Ct. 1967) (treating late charge as liquidated damages and requiring proof of actual detriment). Given the difficulty of establishing this amount with precision for large numbers of transactions and the lack of quantitative guidance in the statute, most lenders choose to followed industry custom, which in Tennessee is a one-time charge equal to 4 or 5% of the late payment amount. (A one-time late charge of 5% is expressly permitted under Tennessee's Industrial Loan and Thrift Company Act, but that statute only applies directly to registrants under that Act, who are highly regulated but also permitted to charge interest rates in excess of the general usury limit. See TCA §§ 45-5-101 through 45-5-504.) A late charge calculated as an ongoing annual percentage of the late payment amount is likely to be construed as a charge for the use of money, and thus would be treated as interest subject to the usury limit, even if the basic transaction is itself a true lease. If a non-Tennessee choice of law provision is upheld, the Tennessee approach to late charges should not affect the lease transaction. If it appears that the chosen state's late charge limitations are in conflict with the Tennessee approach, you should discuss this issue with your counsel in the chosen state to determine the best course to follow to comply with the laws of that state while running as little risk as possible under Tennessee law. D. Sanctions for violating Tennessee's Usury Laws; Use of Savings Clauses. Historically, usury on the face on an instrument voided any interest provisions, and the usuror was required to refund all interest collected. While this result has been mitigated by changes to the usury statute, and only the illegal portion of the interest is now lost to the lender, it is still advisable to include a savings provision in any document that might be construed as a Tennessee contract for the payment of interest. A savings clause provides that in no event will interest payable under the contract exceed the maximum rate. This provision also serves to lessen the likelihood that the charging of usurious interest will be found to be intentional. Unconscionable conduct, defined to include calculated violation of the usury limits with full knowledge of them, in the charging of usurious interest or loan charges is subject to the severe sanctions under Tennessee's usury statutes, including loss of all interest, a penalty equal to twice the amount of interest collected and payment of the wronged party's legal fees. See TCA § 47-14-117. Further, pursuant to TCA § 47-14-112, the "willful collection of usury is a Class A misdemeanor" subject to criminal sanctions.