Arkansas’ usury limit needs to be lifted

The term “usury” essentially means interest. In Arkansas, our Constitution limits the interest rate one can charge to 5% over the federal discount rate, which this week is .50%, or 17%, whichever is lesser.

The reason for this is Amendment 60 to the Arkansas Constitution, which is codified in Article 19, Section 13. Amendment 60 (the Interest Rate Control Act) was enacted in 1982 when the fed discount rate was between 8.5%-11.5%.

However, banks are not subject to this limit, which is why us Arkansas residents don’t benefit from 5.5% rates on our credit cards. The US Supreme Court held in the 1979 case of Marquette National Bank of Minneapolis v. First of Omaha Service Corp that national banks were not subject to each state’s usury limit, only the limit of the state they were based in. Then, in 1999, President Clinton signed the Graham-Leach-Bliley Act, which included a provision directed specifically at Arkansas which removed the 5%+ Fed Discount Rate cap on them as well.

So why is this a problem and how does it relate to property? Let’s say you own a piece of rental property that you have a mortgage on, and your rent is covering the note for you. Maybe you bought the property in the past 5-6 years, with interest rates at historic lows, but since it’s rental property you’re still paying 6-7%, and it’s an adjustable rate after 3-5 years.

Perhaps you’d like to get out from under the headache of renters, and find a buyer. But in this era of tight credit, they can’t qualify for a loan to cash you out. So you agree to finance them for a period of time until they can qualify. You come into my office, and you want me to draw up a contract that matches the interest rate you received from the bank. I can’t. It violates usury to charge that much. As the seller you risk the buyer suing you if they figure it out and you then forfeit ALL interest paid.

Now, some people say this basically just allows “car dealers and retail stores” to raise their interest rates. But the truth is that most of the companies that lend on a regular basis simply incorporate their finance arms in another state without this cap, and thus avoid the limit.

The people it truly hurts are those Arkansas property owners that want to sell to someone who can’t get a bank loan. Typically, despite me telling them they are violating usury, they go ahead and do the deal anyway at that interest rate since the buyer wants the house and couldn’t get that interest rate (or any loan at all) at a bank regardless. But still, us individual sellers run the risk of losing all our interest.

In short, this limit makes no sense, and if Amendment 3 is still on the ballot next year please support it.