By: Bob Ballinger, Real Estate Attorney

“What is Usury in Arkansas?” That is a question that was well settled for years. The Arkansas Constitution set the rate at 5% above the Federal Reserve Primary Credit Rate or 17%, which ever was less. For the last few years the Primary Credit Rate has been .5 and .75 percent, capping the usury at 5.5 and 5.75 percent. Federal preemption exempted banks from the obligation to comply with this rate restriction however private investors have been limited in what they could lawfully charge in interest.

This limit has restricted the profitability of owner financing and hard money lending as an instrument of successful investing. Typically investors found that the risk was not worth the relatively low return. However, all of that may have changed with the passage of Issue 2 last fall.

Issue No. 2, House Joint Resolution 1004, was passed November 2, 2010 as a legislatively-referred constitutional amendment and went into effect on January 1, 2011. The measure modified interest rates limits on loans made by three groups of lending entities:

• Government entities,
• Federally insured depository institutions, and
• All other lenders

The constitutional amendment removed a 5 percent interest cap, but preserved the existing 17 percent cap for consumer credit and also applies it to other non-government debt.

A lawsuit was filed to strike the measure from the November 2, 2010 ballot, however the measure was not taken off of the ballot, due to a ruling by Pulaski County Circuit Court just before the election took place. There was also a lawsuit was filed with the Arkansas Supreme Court, who heard arguments from both sides on October 21, 2010. However, on October 22, 2010, the high court then threw out the lawsuit. According to Associate Justice Donald Corbin in the ruling, “Our review of Amendment 80 and this court’s well-established precedent leads us to conclude that our jurisdiction to hear challenges to amendments referred by the Legislature remains appellate in nature.” However, the separate lawsuit that was filed in Pulaski County Circuit Court was still ongoing at the time of that decision. However, the court refused to keep the measure off of the ballot, with the ruling stating that the ballot title was clear enough for voters to understand.

On June 16, 2011 the Arkansas Supreme Court heard arguments from attorney Eugene Sayre stating that the measure is unconstitutional. The newest legal challenge stated that the measure violated the state’s single-subject rule by including three different topics in one ballot measure. The state’s legislature can only refer up to three measures each election year, which Sayre claimed the lawmaking body tried to get around by putting the alleged multi-topic question on the ballot. According to Sayre: “We maintain these three are disparate and don’t have a common theme, purpose or subject.” At the hearing, Assistant Attorney General Scott Richardson told the justices that three aspects of the measure were related. He claimed that the items all deal with loans and financing. “That test could be used to invalidate a vast array of amendments in our constitution.”

On June 23, 2011, the Arkansas Supreme Court upheld the amendment, stating that the amendment should be allowed, as long as the proposals in the measure were “reasonably germane”.

In summary, under current Arkansas Law, individuals, acting as private lenders, would be restricted to an interest rate not exceeding 17 percent per annum, which is the existing limit for consumer debt under the Arkansas Constitution. However, there is no longer a restriction that interest rates charged cannot be greater than five percent above the Federal Discount Rate. This would include interest rates in a real estate transaction in which an individual finances a portion, or all, of the contract price.