The Death Knell to Loan Sharks by the Supreme Court of Japan: Excessive interest payments held to be returned to borrowers with statutory interest
On July 13, 2007, the Supreme Court of Japan held in two cases that consumer-loan companies return not only excessive payments of unlawful interest to borrowers but also to pay the statutory interest that accrued from the excessive payments, because the consumer-loan companies were found to be bad faith beneficiaries of unjust enrichment. Japanese courts in the statutory law system, as opposed to the common law system, are known to take a very strict approach to the interpretation of laws. In the area of usury law, however, the Supreme Court has established precedents to evade provisions in the Usury Act of 1954 which provides that unlawful interest that was voluntarily paid by debtors is not to be claimed for restitution. Through a shrewd interpretation of pertinent laws, the Supreme Court has repeatedly ordered the return of excessive interest payments to borrowers despite the express provision of non-restitution in the Usury Act. A consistent line of decisions by the Supreme Court has closed loopholes in the Usury Act and prompted a series of legislative reforms for the protection of consumer-loan borrowers.
In December of 2006, the Japanese Parliament passed bills to amend the Usury Act of 1954 and the Loan Business Regulation Act of 1983. One of the amendments deleted a provision in the Usury Act that reads to the effect that a borrower cannot claim the return of the interest payment that exceeds the limitation of the Usury Act when he voluntarily paid that interest. In conjunction with this deletion, a statutory presumption of the voluntariness was also deleted from the Loan Business Regulation Act. The presumption given in the Act was as follows: excessive interest payments are presumed to have been voluntarily made as long as the borrower was informed of core contract terms in written document specified by the Act and was also presented with the receipt of the payment in the format specified by the Act. These amendments can be attributed to the following line of decisions by the Supreme Court over several decades, though a preparation period of two and a half years are allowed for the amendments to take effect.
The Supreme Court judgments of July 13th in effect rang the death knell to excessive interest payments allowed by the Usury Act before these amendments are implemented. The judgments went one step further in the protection of consumer-loan borrowers, because they required the consumer-loan companies to pay to the borrowers the statutory interest that accrued from the excessive interest payments as well as the excessive interest payments themselves. To be sure, it is very rare for the Supreme Court of Japan to commit itself to judicial policy making and to take an initiative in law reform through making judicial precedents. Yet, the regulation of loan sharks is the best known area of law that the Supreme Court took the lead in the legislative reform.
After World War II, the Usury Act was enacted to provide for the ceilings of interest rates: The first paragraph of the Section One in the Act sets out the limits to be 20% interest on a principal of less than ¥100,000 (approximately CA$806), 18% on a principal of ¥100,000 or less than ¥1,000,000, and 15% on a principal of ¥1,000,000 or more. Right after the ceilings provisions, there is a sentence that declares the excessive interest charge to be null and void. The second paragraph of the Section One, however, provides that the excessive interest voluntarily paid by the debtor shall not be claimed for restitution.
It is equivocal to provide that the excessive interest charge is null and void along with the sentence to mean that the void interest payment does not need to be returned to borrowers if the payment is voluntary. The Supreme Court at first interpreted the section in favour of lenders. In a case decided in 1962, debtors claimed for setting off the principal with their excessive interest payments. The Court rejected this claim on the ground that the excessive interest payment was void, but that judicial assistance was not available because of the second paragraph of the Section One. Only two years later, however, the Court changed the position. This is said to be attributable to the retirements of several old justices on the Supreme Court Bench. In a case of 1964, the Court granted to set off the principal with the excessive interest payments on the ground that the excessive interest payments were void and therefore the payments presented without legal obligations were to be counted toward setting off the principal. Please note that this case concerned only the deduction of the principal with the excessive interest not the returning the excessive interest for restitution.
In a subsequent case in 1968, the Court granted the restitution to return the excessive interest payments to debtors when the balance remained after setting off the principal with the excessive interest payments. This may seem a patent disregard for the second paragraph of Section One in the Usury Act that provides that excessive interest payments cannot be claimed for the restitution. Nonetheless, the Court explained that the applicable law is Section 703 of the Civil Code, which provide for the return of the unjust enrichment, not Section One of the Usury Act, because there was no interest involved in the case of no principal remaining.
The rampant prevalence of the usury business in Japan is attributable to the equivocal provisions of the Usury Act and the ignorance of the people on the developments of the Supreme Court precedents. Many borrowers from consumer-loan companies are taken advantage of due to their ignorance of law. There is another great factor that helps the usury business. That is what is called a grey zone interest rate. When the Usury Act was enacted in 1954, the Act of Regulating Investment, Money Deposit and Loan Interest (the Investment Act) was also enacted in the same year. The Investment Act of 1954 provides for criminal punishment on loan sharks. The interest rate punishable by the Investment Act was originally the rate beyond 109.5%. The punishable rate was lowered to the rate beyond 40.004% in 1983. There still exists the zone of interest rate which is unlawful in the Usury Act but not punishable by the Investment Act.
In 1984, when the punishable interest rate was lowered, another act was passed to introduce the administrative control over the consumer-loan business. Consumer-loan financiers are required to register with the Government and provide borrowers with adequate information on core terms of loan contracts in written documents specified by the Investment Act and also a receipt of the payment in the format specified by the same Act. The enactment of the Investment Act was the carrot and the stick for consumer-loan financiers. The lowering the punishable interest and the introduction of administrative oversight are the stick part. The carrot part is that excessive interest payments are to be presumed to have been made voluntarily as long as the written document requirement and the receipt requirement are met. This set of the carrot and stick legislative measures, in a sense, overrode the judicial precedents of making excessive interest payments be returned for restitution.
Even after 1984, the Supreme Court has been making consistent efforts to eradicate loan shark activities by meticulously interpreting the written document requirement and the receipt requirement. To give recent examples, the delay in issuance of the receipt forms for seven to ten days were held deficient to meet the statutory receipt requirement and statements of the loan account consolidated with receipt forms were held unsatisfactory for the purpose of the Investment Act (both decided in 2004). The judgments covered by the headline of this column, rendered in July 2007, also concern the written contract document requirement and the receipt requirement, but went one step further. Consumer-loan financiers who knew or had a reason to know that their written contract documents were deficient were found to be bad faith beneficiaries, so that they were required to pay statutory interest that had accrued from the unjust enrichment as well as the return of the excessive interest payments.
The rampancy of loan shark activities and an increasing number of victims of coercive collection activities have been repeatedly taken up by the mass media in recent years. One newspaper article reported that the number of suicides for the reason of economic hardship outnumbered the death toll of traffic accidents in 2003 for the first time in Japan: the former being 8897, the latter 7702. The majority of economic suicides are believed to be involved in consumer-loan insolvency. The recognition of these situations has lead to the before-mentioned legislative reforms to delete the non-restitution provision in the Usury Act and the statutory presumption of voluntariness in the Loan Business Regulation Act in December 2006. In the long-term legislative reform, it is the Supreme Court that provided doctrinal bases for these legislative measures. The Parliament in the same session made another amendment to the Investment Act of 1954. That is to set the punishable interest rate at the 20%, that is very close to the interest rate ceilings provided in the Usury Act. This is a very important step to plug up loopholes in usury law. It will take two more years for these amendments to be implemented. In the meantime, it is sure that the Supreme Court will keep their oversight on excessive interest payments. And yet, the biggest remaining challenge in usury law is the tight law enforcement against blatant violators of law in the black market of consumer-loan finance.