Usury in revolving cards

Let’s start with some basic concepts to better understand the scope of the discussion.

Usury corresponds to the legal concept of imbalance in reciprocal benefits. Pivots on the concept of “fraud”, whether if that fraud is due to deceit or state of necessity. Usury also implies a presumption. It is presumed that obtaining a 50% higher price over of the credit market average, implies fraud by the lender part.

Usury requires these following two requirements:

(1) A loan at a “notably higher” interest rate than the common one in the market.

(2) An abuse by the lender, due to a situation of economic weakness (understanding weakness in a wide sense) of the borrower.

So this can be considered as a debate about usury… (Rebus sic stantibus or pacta sunt seranda?)

1.- Consumer credit

Consumer credit means all loans granted for the purpose of personal consumption (A mortgage to buy a car loan, holiday’s loan). Loans given to companies or self-employed professionals not included.

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Improper inclusion in Credit Blacklists

Until recently, individuals improperly included in Credit Blacklists hardly exercised legal action. However, the TS has created jurisprudence granting full protection to the right to honor.

There are different types of consumer credit:

a) Personal loans

They consist of loans usually ranging from two thousand to three thousand euros.

The entities grant an amount of money that must be paid back with the additional interest in pre-established instalments.

The instalments and interest can differ depending on the person and the risk that the credit entity assumes. These loans are granted by means of a contract in which the principal amount, interest and term are stated. In this way, the person knows the instalments she will have to pay and the timing for repayment.

b) Quick loans

Loans that are granted almost immediately, for a small amount of money, usually around one thousand euros. The repayment period is usually less than one year. The main difference between quick and personals loans is the amount and term which are inferiors on quick loans.

c) Revolving loans

Revolving cards are credit lines available through credit cards. By using these cards, a credit is granted and the borrower decides how to repay the loan and interests back.

In the contract a fix monthly payment is settled for the borrower, regardless of the amount of credit used. The borrower can choose the quantity of the disposed credit want to pay back or deferred. Consequently, bigger deferred amounts equal higher interests. The sum repaid (with the correspondent interests) is once again added to borrower’s credit and so, from there the “revolving” name.

The main feature of these cards is the granting of a credit regardless of the amount of the credit used.

Revolving cards normally have associated credits of between six hundred and three thousand euros. However, the credit granted depends on the entity, and can reach up to twenty thousand euros or higher.

2. Difference between Credit Cards and Revolving Cards

Credit cards consist in deferring all the expenses a person makes to the end of the month. By the end of the month, all expenses incurred during the month must paid in full. If there is not balance in the account, the bank can charge a percentage on the debt or decline the shopping. This can change depending on the terms of the credit card contract.

In the case of credit cards, payment in instalments and a credit are not necessary included. Revolving cards provides a credit which the borrower can manage and regenerate through periodic payments. In credit cards there is no loan.

3.- Usury

Usury is defined as the unfair benefit obtained by a person/lender. It is a form of unjust enrichment. In the case of credits is the unjust enrichment obtained from the high interest charged for granting a loan.

Article 1 of the Usury Law sets the necessary requirements for the interest on a loan to be considered usurious. These requirements can be summarized as follows:

1. Objective requirements. To arrange an interest for the repayment of the loan higher than the normal interest of the money. In order to know if the interest can be considered “higher than the normal” each case must be analyzed separately. (Normal interest is the average interest, related to the category to which, the transaction in question belongs).
2. Subjective requirements: The lender taking any advantage from a personal situation of the borrower. (As for example mental disability, ignorance or a situation of distress of the borrower).

4.- When Revolving Cards can be considered usurious according to case law?

As we have mentioned according to law, for usury to occur, both the objective and the subjective requirements must concur. However recent case law does not require both requirements to declare usury.

For case law the objective requirement is enough to consider that the interest on the credit/loan is usurious. [Supreme Court Ruling (STS) 628/2015, of 25 November]. And it is based on the Court’s analysis of the concept “normal interest of the money”.

This ruling was adopted by the Supreme Court (SC) ruling STS 149/2020, which includes “normal interest of the money” concept. We will analyze this in the following point 5.

5.- Supreme Court ruling of April 4^th 2020.

The April 2020’s SC ruling provides an interpretation of normal interest as a reference of when a credit is usurious (which includes revolving card’s credit):

• The normal interest is the scale to be used to establish whether the interest on remuneration is usurious. Normal interest is the average interest related to the category to which the transaction in question belongs.

In the revolving cards case this average is the one applied to credit and revolving operations published by the Bank of Spain.

• The Supreme Court considers normal interest rate for revolving operations anyone slightly exceeding 20%. Unfortunately, the Supreme Court did not define what we should understand for “slightly excess”.

Apart from the normal interest, according the SC other circumstances may be relevant to reject a contract as usurious:

– The potential clients to whom revolving cards are usually intended, assimilating them with low-income and uneducated consumers.

– Individuals who cannot access to less burdensome credits.

– The peculiarities of revolving credit itself:

• In which the credit limit is constantly recomposing.
• That accrued interest and commissions are capitalized to accrue the remunerative interest.
• The amounts of the installments are generally not very high, compared to the outstanding debt. But the installments are considerably extended in the time during which the borrower continues paying the installments. So, consequently, the borrower is at the end a “captive debtor” (as literally says the ruling).

6.- Conclusion

It is understandable that the entity that grants the card is assuming a very high risk when granting revolving cards. That is why case law clarifies that the Banks are responsible for knowing to whom they are lending the money. A Bank cannot impose the same interest rate on all clients by claiming that there is a high level of default.

The high level of default is caused because it is not properly checked to whom the loans are being granted. If the same interest rates are set for all clients, without previously checking their solvency, the imposition of such interest cannot be justified.

This is established by the recent STS 149/2020. Therefore, the lender may not pay the interest on revolving card credit if it is considered usurious.