Usury
Charging interest in excess of the maximum rate authorized by law. Texas usury law applies to commercial AND consumer loans (unlike many states). The Texas Constitution sets a 10% default ceiling; Texas Finance Code Chapter 303 authorizes ceilings up to 18% for commercial loans that comply with stated requirements. Penalties for violation include forfeiture of all interest, refund of overcharges, and in some cases treble damages.
Usury is the act of charging interest in excess of the maximum rate authorized by law. Unlike many states, Texas usury law applies to both consumer and commercial loans, a distinctive feature that surprises out-of-state lenders extending credit to Texas borrowers. Texas usury law is rooted in the Texas Constitution and elaborated through the Texas Finance Code; violations expose the lender to civil penalties including forfeiture of interest, double the overcharge, and in some cases treble damages plus attorney's fees.
Constitutional and statutory ceilings
Article XVI, Section 11 of the Texas Constitution sets two baseline rates: (1) when a written agreement specifies an interest rate, the constitutional ceiling is 10% per year; (2) when the agreement is silent on interest, the rate cannot exceed 6% per year. The Constitution permits the Legislature to authorize higher rates "by law." The Legislature has done so through the Texas Finance Code, which establishes a series of category-specific ceilings substantially higher than 10%.
The 18% commercial loan ceiling
Section 303.009 establishes a "weekly ceiling" calculated based on a federal formula but with an absolute floor of 18%. For commercial transactions, the weekly ceiling has been at the 18% floor for many years, effectively making 18% the maximum legal interest rate for commercial loans subject to Chapter 303. The Texas Office of Consumer Credit Commissioner (OCCC) publishes the weekly ceiling in the Texas Credit Letter; lenders rely on the published rate to ensure compliance. The 18% ceiling generally applies absent specific statutory authorization for higher rates (e.g., credit cards under § 346.101).
What counts as "interest"
Texas usury law defines "interest" broadly to capture amounts characterized as something else but functioning as compensation for the use of money. Key inclusions and exclusions: (1) included, stated interest; loan-origination fees that exceed reasonable cost; commitment fees that are unreasonable in relation to the credit extended; default rates and late charges that exceed reasonable limits; (2) excluded, bona fide third-party costs (title insurance, escrow fees, property taxes); time-price differentials in genuine credit sales; reasonable commitment and origination fees; warrants and equity kickers when properly structured. The substance-over-form principle applies, courts look at the economic effect, not the labels.
Substance over form
Texas courts apply substance-over-form analysis to detect disguised loans: a transaction structured as a sale, investment, or partnership but functioning economically as a loan can be reclassified as a loan and tested against usury limits. Holley v. Watts, 629 S.W.2d 694 (Tex. 1982), is the foundational case on the sale-vs.-loan distinction. Indicators of a loan disguised as a sale: (1) repayment obligation absolute, not contingent; (2) seller's continuing operational control; (3) "buyer's" return is fixed rather than tied to underlying performance; (4) seller bears credit risk on the receivables; (5) recourse provisions favoring the "buyer."
Penalties for usury
Section 305 penalties depend on the nature and amount of the usury. Mild penalties: forfeiture of all interest contracted for or charged. Severe penalties (typically requiring a knowing or willful violation, or substantial usury): three times the amount of usurious interest contracted for or charged. Lenders may face attorney's fees as additional penalty. The cure provision in § 305.103 allows lenders to avoid penalties by providing the borrower a cure offer within 60 days of receiving notice of the alleged usury, refunding overcharges and corrected loan terms going forward.
Savings clauses
Texas usury practice relies heavily on "usury savings clauses", contract provisions stating that any interest exceeding the legal maximum is automatically reduced to the legal maximum and any overage refunded. Savings clauses are generally enforceable but not unlimited: a lender cannot contract for an obviously usurious rate (e.g., 30%) and rely on a savings clause to escape penalty. The savings clause must operate against a contract that could be performed legally; clearly contrary contracts cannot be saved. Modern Texas commercial loan documents universally include savings clauses as a defensive measure.
Out-of-state lender considerations
Lenders extending credit from non-Texas jurisdictions to Texas borrowers should not assume they can rely on home-state usury rules. Texas applies its usury law to loans where the contacts with Texas are sufficient; choice-of-law clauses selecting non-Texas law will be honored only when the contacts with the chosen jurisdiction are sufficient and the chosen jurisdiction has a "substantial relationship" to the transaction. Federal preemption under the National Bank Act, Federal Credit Union Act, and similar statutes may permit national banks and federally chartered institutions to "export" home-state rates to Texas borrowers; private lenders generally cannot.
For Texas commercial lenders, the 18% ceiling is rarely a binding constraint for traditional bank loans, where rates are well below 18% almost regardless of credit quality. The ceiling becomes practical for: (1) mezzanine debt, all-in rates approach or exceed 18% with PIK and equity components; (2) hard-money real estate lending, short-term, high-rate loans against equity-heavy collateral; (3) merchant cash advances and factoring, although these often qualify as purchases rather than loans; (4) default-rate provisions, increased rates on default that, combined with regular interest, can exceed the ceiling. Best practice: (1) include a properly drafted usury savings clause in every commercial loan document; (2) carefully analyze all-in cost of credit (interest + fees + warrants) against the ceiling; (3) for high-rate structures, consider non-recourse-loan-with-equity-kicker treatment to extract economics outside the usury framework; (4) confirm choice-of-law analysis when out-of-state law would be more permissive.