MAXIMUM INTEREST RATES UNDER 1981 STATE LEGISLATION

USURY ‑- INTEREST ‑- REAL ESTATE ‑- CONTRACTS ‑- BANKS AND BANKING ‑- SALE ‑- MAXIMUM INTEREST RATES UNDER 1981 STATE LEGISLATION 

(1) In the light of 1981 legislation, the maximum rate of interest, or service charge, which may now lawfully be imposed in connection with designated types of transactions is as follows: 

(a) Contract sales of real property‑-the higher of twelve percent per annum or four percentage points over the equivalent coupon issue yield of the average bill rate for twenty-six week treasury bills as determined at the first bill market auction conducted during the preceding calendar month (e.g., for contracts entered into in June, 1981, 20.58 percent), except that this limitation is not applicable if the particular contract is not primarily entered into for personal, family or household purposes or if the transaction is for agricultural, commercial, investment or business purposes and the purchaser is not a natural person; 

(b) Retail installment sales transactions‑-1-1/2 percent per month (or $1 if greater) for retail charge agreement transactions (e.g., purchases pursuant to a retailer's credit card) and, in the case of purchases covered by a retail installment contract, six percentage points above the average of the equivalent coupon yields of the bill rates for twenty-six week treasury bills for the last market auction conducted during February, May, August and November of the year prior to the year in which the contract is executed (e.g., for retail installment contracts during calendar year 1981, 18.5 percent); 

(c) Bank credit card transactions‑-the higher of (i) 12 percent, (ii) the rate computed by application of the same formula as now applies to real estate contracts, above, or (iii) 1 percent above the Federal Reserve Bank's discount rate; 

(2) The foregoing interest rate limitations apply to (a) contracts for the sale of real property entered into on or after May 8, 1981, with the caveat that the general usury statute, chapter 19.52 RCW, should be deemed to have become applicable to such contracts as of February 11, 1981; (b) retail installment transactions likewise occurring on or after May 8, 1981 with, however, a limited exception involving certain existing agreements; and (c) bank credit card transactions entered into on or after May 8, 1981, the effective dates of chapters 77 and 78, Laws of 1981. 

[[Orig. Op. Page 2]] 

                                                              - - - - - - - - - - - - - 

                                                                    July 24, 1981 

Honorable Barbara Granlund
St. Rep., 26th District
3777 Pine Tree Drive
Port Orchard, WA 98366

Cite as:  AGO 1981 No. 9                                                                                                                  

Dear Representative Granlund:

           By letter previously acknowledged, you requested our opinion on certain questions which we paraphrase as follows:

             (1) In the light of action taken by the recent, 1981, legislature, what is the maximum rate of interest, or service charge, which may lawfully be imposed in the State of Washington in connection with the following transactions:

             (a) Sales of real property pursuant to an ordinary real estate contract;

             (b) Retail sales of goods or services pursuant to a retail installment contract or a retail charge agreement under chapter 63.14 RCW;

            (c) Transactions involving the use of a bank credit card issued by a national bank or other federally-insured financial institution?

             (2) Do the answers to the foregoing questions apply to transactions initiated after the effective date of the subject legislation or, instead, do they also apply to transactions earlier entered into?

             We answer your questions in the manner set forth in our analysis.

              [[Orig. Op. Page 3]]

                                                                    ANALYSIS

             Question (1):

             We will address, separately, the various subparts of your first question, beginning with‑-

             (a)Contract Sales of Real Property:

             In AGO 1980 No. 12, copy enclosed, relying on the reasoning of our state Supreme Court inHafer v. Spaeth, 22 Wn.2d 378, 156 P.2d 408 (1945), we concluded that:

             "A two-party real estate contract for the sale of residential real property, involving only the owner-seller (whether commercial or private) of the real property and the purchaser thereof, is not subject to the twelve percent per annum interest limitation contained in Washington's usury statute, RCW 19.52.020."

             In so concluding, however, we distinguished that situation from one in which a third-party financier (e.g., a bank or other financial institution) was also involved and noted, in that context, the decision of the Court inNational Bank of Commerce v. Thomsen, 80 Wn.2d 406, 495 P.2d 332 (1972).  And, in addition, because of the Thomsen case, we cautioned that Hafer v. Spaeth,supra, might well be overruled by the court at some time in the (then) near future.

             That, in turn, is precisely what happened when, in early February of this year, the Court issued its decision in Whitaker v. Spiegel, Inc., 95 Wn.2d 408, 623 P.2d 1147 (1981).  Accordingly, by our letter of February 13, 1981 to State Representative Shirley Winsley (to whom AGO 1980 No. 12 was also issued) we advised as follows:

             "Now, . . .Hafer v. Spaeth has been squarely overruled.  And, moreover, we continue to see no basis for distinguishing between an installment contract for the sale of personal property  [[Orig. Op. Page 4]] and one for the sale of real property. . . .  Therefore . . . we must now likewise reverse the conclusion stated in . . . [AGO 1980 No. 12] and advise that even a two-party real estate contract such as is referred to therein is subject to the twelve percent per annum interest limitation in RCW 19.52.020, supra."

             Even more recently, however, another event has occurred which bears on the matter.  On June 4, 1981, the state Supreme Court entered an order amending its prior opinion inWhitaker v. Spiegel, Inc., supra.  Specifically, the Court added the following four additional paragraphs to the opinion:

             "The last question we must decide is whether our decision should have a retroactive effect.  In light of the impact on presently existing agreements entered into over many years in reliance on the usury statute, RCW 19.52, as construed in Hafer v. Spaeth, 22 Wn.2d 378, 156 P.2d 408 (1945), we think justice requires that this decision be applied prospectively only, except for a limited retroactive application to the parties in this case.

             "Courts may give a party the benefit of its own lawsuit, where that party has prevailed in its contention that the old law should be overruled.  Cascade Security Bank v. Butler, 88 Wn.2d 777, 784, 567 P.2d 631 (1977).  However, '[a]ppellate courts possess the power to give their decisions prospective effect,i.e., not to apply the decision to the parties in the overruling case.'  Cascade Security Bank, at 785.  If a party has justifiably relied on the overruled case, we must decide whether a retroactive application of the  [[Orig. Op. Page 5]] overruling decision would defeat these reliance interests.  Geise v. Lee, 10 Wn. App. 728, 732-33, 519 P.2d 1005 (1974), rev'd on other grounds, 84 Wn.2d 866, 529 P.2d 1054 (1975).

             "Over the years since the Hafer decision, there have been untold numbers of transactions in reliance on that decision.  Indeed, the Attorney General has recently published an opinion advising that the usury statute did not apply to installment sales of real property and relying onHafer.  Attorney General Opinion, May 20, 1980.  It would be unfair now to give our decision a general retroactive effect and expose well meaning vendors to the consequences of charging interest that has become usurious as a result of this decision.  Thus, as to all affected persons not parties to this lawsuit, the decision will apply prospectively only from the date of filing.

             "As to the parties herein, however, there has been no reliance onHafer.  Respondents, the prevailing parties, urged that Hafer be overruled, as we have done.  Spiegel has never relied onHafer, since it at all times during this litigation insisted that Illinois law applied to the subject transactions.  As a result, it has suffered no hardship occasioned by its reliance onHafer.  Accordingly, the decision is given limited retroactive effect as to the parties to this lawsuit only.  Cascade Security Bank v. Butler, supra; Taskett v. KING Broadcasting Co., 86 Wn.2d 439, 546 P.2d 81 (1976)."1/

              [[Orig. Op. Page 6]]

            What all of this means, in brief summary, is that such ordinary, two-party, real estate contracts as were the subject of AGO 1980 No. 12,supra, should now be deemed to have remained outside the purview of Washington's usury statute, RCW 19.52.020, until the date of filing of the Court's decision and order inSpiegel, supra.2/

             Thereafter, however, such contracts (i.e., those entered into after that date) will be governed, with respect to the legal rate of interest which may be imposed, by that law.

             This brings us then, to the essence of your present question.  By its enactment of § 1, chapter 78, Laws of 1981 (H.B. 137) the legislature amended RCW 19.52.020 to read as follows:

             "Any rate of interest not exceeding the higher of twelve percent per annumor four percentage points above the equivalent coupon issue yield (as published by the Federal Reserve Bank of San Francisco) of the average bill rate for twenty-six week treasury bills as determined at the first bill market auction conducted during the preceding calendar month, agreed to in writing by the parties to the contract, shall be legal, and no person shall directly or indirectly take or receive in money, goods, or things in action, or in any other way, any greater interest ((, sum or value)) for the loan or forbearance of any money, goods, or things in action ((than twelve percent per annum)):  PROVIDED, That in any loan of money in which the funds advanced do not exceed the sum of five hundred dollars, a setup charge may be charged and  [[Orig. Op. Page 7]] collected by the lender, and such setup charge shall not be considered interest hereunder:  PROVIDED FURTHER, That such setup charge does not exceed four percent of the amount of funds advanced, or fifteen dollars, whichever is the lesser, except that on loans of under one hundred dollars a minimum not exceeding four dollars may be so charged.

             "Any loan made pursuant to a commitment to lend at an interest rate permitted at the time the commitment is made shall not be usurious.  Credit extended pursuant to an open-end credit agreement upon which interest is computed on the basis of a balance or balances outstanding during a billing cycle shall not be usurious if the rate at which interest is charged is not usurious on any day during the billing cycle."3/

              Accordingly, even though the rate of interest which may be charged on those real estate contracts to which‑-as a consequence ofSpiegel,supra‑-the provisions of RCW 19.52.020,  [[Orig. Op. Page 8]] supra, now apply is that set forth therein, the maximum rate of interest is no longer twelve percent per annum‑-as it would have been if chapter 78 had not been enacted.  Rather, in the words of the above‑quoted amendment, the rate which may now be charged is,

             ". . . the higher of twelve percent per annum or four percentage points above the equivalent coupon issue yield (as published by the Federal Reserve Bank of San Francisco) of the average bill rate for twenty-six week treasury bills as determined at the first bill market auction conducted during the preceding calendar month, . . ."

             The statute thus now establishes a formula for determining the maximum interest rate which can be charged for those transactions‑-including real estate contracts under theSpiegel reasoning‑-which are not otherwise exempt from the coverage of chapter 19.52 RCW.  And, under that formula, the actual maximum rate may vary from one calendar month to another, depending on when the particular contract was executed or otherwise entered into.  For the determination is to be made anew, each month, by adding four percentage points to ". . . the equivalent coupon issue yield for twenty-six week treasury bills as determined at the first auction for such bills conducted during the preceding calendar month."4/

              In addition, however, it should here be noted that the overall coverage of chapter 19.52 RCW is now in certain respects  [[Orig. Op. Page 9]] more restricted than before.  This is so because, by § 2, chapter 78, supra, the legislature also amended the pre‑existing language of RCW 19.52.080 to read as follows:

             "Profit and nonprofit corporations, Massachusetts trusts, associations, trusts, general partnerships, joint ventures, limited partnerships,and governments and governmental subdivisions, agencies, or instrumentalities may not plead the defense of usury nor maintain any action thereon or therefor, and persons may not plead the defense of usury nor maintain any action thereon or therefor if the transaction was ((exclusively))primarily for agricultural, commercial,investment, or business purposes:  PROVIDED, HOWEVER, That this section shall not apply to a consumer transaction of any amount ((, or to a commercial or business transaction not exceeding fifty thousand dollars)).

             "Consumer transactions, as used in this section, shall mean transactions primarily for personal, family, or household purposes."

             Thus, it will be seen that natural persons may not raise the issue of usury with respect to a particular transaction if that transaction was primarily for agricultural, commercial, investment or business purposes.  Similarly, while corporations, associations and other types of legal entities enumerated in RCW 19.52.080,supra, may raise usury as a defense, they may do so only with respect to consumer transactions.

             Summary:

             In summary, therefore, we answer part (a) of your question as follows:  Generally speaking, the maximum rate of interest which may now be charged in connection with the sale of real  [[Orig. Op. Page 10]] property pursuant to an ordinary real estate contract is the higher of twelve percent or the rate developed for the month in which the transaction is entered into by application of the formula now set forth in RCW 19.52.020,supra.  If, however, the particular contract is not entered into ". . . primarily for personal, family, or household purposes . . ." the above‑stated limit does not apply.  And there is likewise no maximum rate of interest in any case where the purchaser is a natural person and the transaction is ". . . primarily for agricultural, commercial, investment or business purposes . . ."

             (b)Retail Installment Sales Transactions:

             Whitaker v. Spiegel, Inc., supra, also bears on our disposition of this part of your first question.  In that case the Court held that retail installment sales transactions were subject to both the Retail Installment Sales Act, chapter 63.14 RCW (hereafter referred to as RISA), and to the general usury statute, chapter 19.52 RCW,supra.  Thereafter, however, by § 3, chapter 78, Laws of 1981 (H.B. 137), supra, the legislature specifically exempted such transactions from the provisions of chapter 19.52 RCW and, instead, caused them to be governed only by RISA.  And then, by a companion measure, chapter 77, Laws of 1981 (H.B. 160) the legislature amended certain provisions of that latter law.5/

              A retail installment transaction is defined in RCW 63.14.010(5) as follows:

             "(5) 'Retail installment transaction' means any transaction in which a retail buyer purchasesgoods or services from a retail seller pursuant to a retail installment contract or a retail charge agreement, as defined in  [[Orig. Op. Page 11]] this section, which provides for a service charge, as defined in this section, and under which the buyer agrees to pay the unpaid balance in one or more installments or which provides for no service charge and under which the buyer agrees to pay the unpaid balance in more than four installments."  (Emphasis supplied)6/

              In addition, within the purview of this term, there are two other terms which are also statutorily defined.  They are, respectively, "retail installment contract" and "retail charge agreement."  A retail installment contract is defined by RCW 63.14.010(6) as follows:

             "(6) Retail installment contract or contract means a contract, other than a retail charge agreement or an instrument reflecting a sale made pursuant thereto, entered into or performed in this state for a retail installment transaction.  The term 'retail installment contract' may include a chattel mortgage, a conditional sale contract and a contract in the form of a bailment or a lease if the bailee or lessee contracts to pay as compensation for their use a sum substantially equivalent to or in excess of the value of the goods sold and if it is agreed that the bailee or lessee is bound to become, or for no other or a merely nominal consideration, has the option of becoming the owner of the goods upon full compliance with the provisions of the bailment or lease;"

            Conversely, a retail charge agreement is defined in RCW 63.14.010(7) as follows:

              [[Orig. Op. Page 12]]

            "(7) 'Retail charge agreement,' 'revolving charge agreement' or 'charge agreement' means an agreement entered into or performed in this state prescribing the terms of retail installment transactions which may be made thereunder from time to time and under the terms of which a service charge, as defined in this section, is to be computed in relation to the buyer's unpaid balance from time to time;"

             And, in turn, the maximum rate of interest, or service charge, which may be imposed upon the buyer in connection with a given transaction to which RISA is applicable now depends upon whether the purchase is made pursuant to a retail installment contract or a retail charge agreement.  Accord, RCW 63.14.130 which, as amended by § 5, chapter 77, Laws of 1981, supra, now reads as follows:

             "The service charge shall be inclusive of all charges incident to investigating and making the retail installment contract or charge agreement and for the privilege of making the installment payments thereunder and no other fee, expense or charge whatsoever shall be taken, received, reserved or contracted therefor from the buyer.

             "(1) The service charge, in a retail installment contract, shall not exceed the highest of the following:

             "(a) ((One percent per month on the outstanding unpaid balances, or))A rate on outstanding unpaid balances which exceeds six percentage points above the average, rounded to the nearest one‑quarter of one percent, of the equivalent coupon issue yields (as published by the Federal Reserve Bank of San Francisco) of the bill rates for twenty-six week treasury bills for the last market auctions conducted during  [[Orig. Op. Page 13]]February, May, August, and November of the year prior to the year in which the retail installment contract is executed; or

             "(b) Ten dollars.

            "(2) The service charge in a retail charge agreement, revolving charge agreement or charge agreement, shall not exceed one and one‑half percent per month on the outstanding unpaid balances.  If the service charge so computed is less than one dollar for any month, then one dollar may be charged.

             "(3) A service charge may be computed on the median amount within a range which does not exceed ten dollars and which is a part of a published schedule of consecutive ranges applied to an outstanding balance, provided the median amount is used in computing the service charge for all balances within such range.

             "(((4) The service charge in a retail installment contract or charge agreement shall not exceed the rate of twelve percent per annum, computed monthly.  A service charge computed by one of the foregoing methods, or within the permitted minimum charges, shall be deemed not to be in excess of twelve percent per annum computed monthly.))"

             Thus, while the legislature has fixed a flat maximum rate of 1-1/2 percent per month (or $1 if greater) for retail charge agreement transactions, it has, in the case of those purchases covered by a retail installment contract, once again taken the formula route‑-much as it did, in chapter 78, supra, in connection with the general usury statute.  For example, we are advised that the rounded off average rate for the last market auctions for the appropriate months of 1980 is 12.5 percent.  Thus, applying the formula, the maximum rate chargeable for retail installment contracts during calendar year 1981 is 18.5 percent.

              [[Orig. Op. Page 14]]

            Summary:

             We again summarize for ease of comprehension.  The answer to part (b) of your first question is thus as follows:  The maximum rate of interest which may be lawfully agreed to in a retail installment contract entered into during calendar year 1981 is 18.25 percent or $10, whichever is higher.  Similarly, in other years, the maximum rate will also be established through application of the same formula‑-now set forth in RCW 63.14.130(1),supra.  On the other hand, in the case of a retail charge agreement transaction, the maximum rate is 1-1/2 percent per month or $1, whichever is higher.

             (c)Bank Credit Card Transactions:

             One other thing which was done by the legislature through its enactment of chapters 77 and 78, Laws of 1981, supra, was to draw, for the first time, a "state law" distinction between two types of commonly-used credit cards‑-those issued directly by commercial retailers (e.g., Penney's or Sears) and those issued by banks or other lending institutions (e.g., VISA or Mastercard).  The former represent a type of "retail charge agreement" situation and, thus, remain governed by RISA (chapter 63.14 RCW), supra, which we have just discussed.  Accord, AGO 1968 No. 6, copy enclosed.  But, contrary to the conclusion also stated in that 1968 opinion, the latter (bank credit cards) are now no longer governed by RISA but, instead, are covered, insofar as state law is concerned, by the general usury statute.  That is so because of § 10, chapter 77, Laws of 1981, supra, by which the legislature added the following new section to chapter 63.14 RCW:

             "A lender credit card is a card or device issued under an arrangement pursuant to which the issuer gives to a card holder residing in this state the privilege of obtaining credit from the issuer or other persons in purchasing or leasing property or services, obtaining loans, or otherwise, and the issuer of which is not principally engaged in the business of selling goods.

              [[Orig. Op. Page 15]]

            "A lender credit card agreement and credit extended pursuant to it is not subject to the provisions of this chapter but shall be subject to the provisions of chapter 19.52 RCW."  (Emphasis supplied)7/

              What this now means, as a matter of state law, is that the maximum interest rate generally applicable to those transactions involving the use of bank credit cards‑-including retail purchases of goods or services‑-is now to be computed on the basis of the same maximum interest rate formula (see, RCW 19.52.020, supra, as amended by § 1, chapter 78, Laws of 1981) which we discussed above with respect to real estate contracts.8/

             There is, however, a further point also to be noted.

             By far the majority of all lender credit cards (as above defined) are issued by national banks which are governed by the National Banking Act or by state‑chartered commercial banks, savings and loan associations or credit unions which participate in federal insurance programs under the Federal Depository Institutions Deregulation and Monetary Control Act of 1980.9/   And, under those acts, a higher rate of interest is allowed than is permissible under state law.  For example, 12 U.S.C. § 85, a part of the National Banking Act, reads in relevant part as follows:

             "Any association may take, receive, reserve, and charge on any loan or discount made, or upon any notes, bills of exchange, or other evidences of debt, interest at the rate allowed by the laws of the State, Territory,  [[Orig. Op. Page 16]] or District where the bank is located,or at a rate of 1 per centum in excess of the discount rate on ninety-day commercial paper in effect at the Federal reserve bank in the Federal reserve district where the bank is located, . . . whichever may be the greater, and no more, except that where by the laws of any State a different rate is limited for banks organized under State laws, the rate so limited shall be allowed for associations organized or existing in any such State under this title. . . ."

            (Emphasis supplied)

             In AGO 1980 No. 11, a copy of which is also enclosed, we concluded that a credit card transaction results in an evidence of debt, that the service charge paid by the user constitutes "interest," and that the foregoing language thus authorizes a national bank to charge a rate equal to cent higher than the Federal Reserve Bank's discount rate.  The fact that the "state law" in question is now chapter 19.52 RCW rather than chapter 63.14 RCW is of no legal significance in that respect.  And, since the issuance of AGO 1980 No. 11, supra, similar language has been added by Congress to the federal statutes governing state‑chartered commercial banks, savings and loan associations and credit unions which participate in similar federal insurance programs.

            Summary:

             For the foregoing reasons, our answer to part (c) of your question, in brief summary, is as follows:  The maximum interest rate which may be charged on a transaction involving the use of a credit card issued by a federally-insured bank or other federally-insured financial institution is the higher of (a) twelve percent, (b) the rate computed by application of the formula set forth in RCW 19.52.020,supra, or (c) 1 percent above the Federal Reserve Bank's discount rate, as the case may be.10/

             [[Orig. Op. Page 17]]

            Question (2):

             In addition to posing the foregoing questions, you have also asked if our answers to those questions apply only to transactions initiated after the effective date of the subject legislation or, instead, whether those answers also apply to transactions entered into earlier.

             (a)Contract Sales of Real Property:

             First, in the case of real estate contracts, we have already alluded to the impact on this question of the Supreme Court's recent amendment to its earlier decision inWhitaker v. Spiegel, Inc., supra.  As a consequence of that action by the Court, it would appear to us that no claim of usurious interest under a real estate contract will be afforded any judicial relief, in the course of litigation, where the particular contract involved was entered into prior to the date of filing (February 11, 198111/ ) of the Court's reported decision in theSpiegel case.

             In addition, however, we note again the language of § 9, chapter 78, Laws of 1981, which added the following new section to the general usury statute, chapter 19.52 RCW:

             "No person may plead the defense of usury or maintain any action thereon or therefor for the interest charged on the unpaid balance of a contract for the sale and purchase of . . . real property if the purchase was made after May 1, 1980 and prior to March 1, 1981."

              [[Orig. Op. Page 18]]

            Under this provision neither party to a contract entered into during the period therein indicated can now, in any event, raise the issue of usury even though the contract's interest rate exceeds that permissible under either the current law or that in effect when the contract was signed.

           (b)Retail Installment Transactions:

            Next, in the case of retail installment transactions covered by chapter 63.14 RCW (RISA) the answer to your second question will be found in § 13, chapter 77, Laws of 1981,supra, which reads as follows:

             "This act applies only to loans, forbearances, or transactions which are entered into after the effective date of this act or to existing loans, forbearances, contracts, or agreements which were not primarily for personal, family, or household use in which there is an addition to the principal amount of the credit outstanding after the effective date of this act."

             Accordingly, the new (and generally higher) interest rates now permitted in connection with retail installment transactions (as outlined in our answer to part (b) of your first question, above) may only be imposed, lawfully, in connection with transactions entered into on or after May 8, 1981 (i.e., the effective date of chapter 77,supra)‑-with the only exception being in the case of existing ". . . loans, forbearances, contracts or agreements which were not primarily for personal, family or household use . . ." and ". . . in which there is an addition to the principal amount of the credit outstanding after . . ." that date.12/

              [[Orig. Op. Page 19]]

            (c)Bank Credit Card Transactions:

             Finally, in the case of bank credit card transactions, we note, once more, that the statutory language removing lender credit card transactions from the Retail Installment Sales Act was set forth in chapter 77, Laws of 1982,supra.  But again, as above noted, § 13 of that act makes its application prospective only, except for loans ". . . not primarily for personal, family, or household use . . ."‑-to which an additional principal obligation is added after the act's effective date, May 8, 1981.  And thus, for all practical purposes, our response to this portion of your second question is, quite simply, that our answer to question (1)(c), supra, is only applicable to bank credit card transactions entered into after the effective date of that 1981 law.