Loan Shark

A loan shark is a lender who extends credit on terms enforced by the threat of harm rather than by law. The phrase is colloquial and does not appear in the federal statute that reaches the conduct. What federal law criminalizes is the extortionate extension of credit, which 18 USC 891(6) defines as "any extension of credit with respect to which it is the understanding of the creditor and the debtor at the time it is made that delay in making repayment or failure to make repayment could result in the use of violence or other criminal means to cause harm to the person, reputation, or property of any person." The companion definition at 891(7) covers "extortionate means", which is "any means which involves the use, or an express or implicit threat of use, of violence or other criminal means" to cause that harm.

The distinction from a merely illegal rate is worth stating up front, because the two are often collapsed. Charging above the maximum a state's law allows is usury, a civil matter with civil consequences. Chapter 42 is about enforcement by threat, and it is a crime whatever the rate. A licensed lender can charge a usurious rate without coming near this chapter, and a lender can fall inside this chapter at a rate a state would permit.

Where the chapter came from, and the company it keeps. 18 USC chapter 42 was added by Public Law 90-321, title II, section 202(a), on May 29, 1968. Title I of that same Act is the Truth in Lending Act. Congress addressed disclosure and extortionate lending in one statute, and its findings at section 201 explain why: "A substantial part of the income of organized crime is generated by extortionate credit transactions," and such transactions "are characterized by the use, or the express or implicit threat of the use, of violence or other criminal means to cause harm to person, reputation, or property as a means of enforcing repayment."

Three offenses, and the second one is the reason the chapter works. Section 892(a) reaches whoever "makes any extortionate extension of credit, or conspires to do so," with a maximum of twenty years. Section 893 reaches financing such lending. Section 894(a) is separate and independent: it reaches whoever "knowingly participates in any way, or conspires to do so, in the use of any extortionate means (1) to collect or attempt to collect any extension of credit, or (2) to punish any person for the nonrepayment thereof," again with a twenty-year maximum. So a person who had nothing to do with making the loan commits a federal crime by collecting it that way, and the underlying loan does not have to have been extortionate when it was made.

The four-factor test, and what it is and is not. Section 892(b) provides that if all four of the following were present, "there is prima facie evidence that the extension of credit was extortionate, but this subsection is nonexclusive and in no way limits the effect or applicability of subsection (a)":

First, that repayment "would be unenforceable, through civil judicial processes against the debtor" in the jurisdiction where the debtor resided or was incorporated at the time the credit was extended. This is the hinge that connects the criminal chapter to state usury law: a loan a state's courts will not enforce is the kind of loan that has to be collected some other way.

Second, that the credit "was made at a rate of interest in excess of an annual rate of 45 per centum calculated according to the actuarial method of allocating payments made on a debt between principal and interest, pursuant to which a payment is applied first to the accumulated interest and the balance is applied to the unpaid principal."

Third, that the debtor reasonably believed either that the creditor had used extortionate means on other loans, or that the creditor "had a reputation for the use of extortionate means".

Fourth, that the total credit outstanding from that creditor to that debtor, including unpaid interest or similar charges, "exceeded $100."

Two things follow. The 45 percent figure is not a threshold above which lending becomes criminal; it is one of four conditions that together shift the evidentiary burden. And because the subsection is expressly nonexclusive, the government is not confined to it: the offense is the understanding described in 891(6), which can be proved any way it can be proved.

The chapter's definitions are deliberately wide. "To extend credit" at 891(1) covers any arrangement, "tacit or express," by which repayment of a debt "whether acknowledged or disputed, valid or invalid, and however arising, may or will be deferred," which reaches informal arrangements that never resembled a loan agreement. "To collect an extension of credit" at 891(5) means "to induce in any way any person to make repayment thereof." And 891(3) defines "debtor" to include "any person who guarantees the repayment of that extension of credit, or in any manner undertakes to indemnify the creditor against loss," so someone who never received a dollar is inside the chapter's protection on the same terms as the borrower.

A practical note for anyone reading this because it describes their situation. The chapter is enforced by federal prosecutors, not by the borrower, and it creates offenses rather than a private remedy. The threats it describes are separately crimes under state law, reportable to local police, and the borrower's own conduct in taking the loan is not what the statute is aimed at.

The arrangement the statute describes is an informal one. There is no application, no disclosure and often no paper. The lender advances cash, sets a payment that recurs on a short cycle, and relies on the borrower's understanding of what happens if the payment stops. Where the debt is one a court would not enforce, which is the first of the four factors at 18 USC 892(b), the collection mechanism is the whole product.

A hypothetical against the four factors. Aurelio borrows $3,000 and is told to bring $150 every week, with the $3,000 still owing at the end. Nothing he pays reduces the principal, so every payment is interest: $150 on a $3,000 balance is 5 percent for the week, and 52 weeks at 5 percent is an annual rate of 260 percent. Because the principal never falls, applying payments first to accumulated interest and the balance to principal, which is the actuarial method the statute names, gives the same figure. That clears the 45 percent factor several times over, and the fourth factor, more than $100 outstanding, is met by the first advance.

The remaining two factors are the ones that decide the case, and neither is arithmetic. Whether the arrangement would be unenforceable where Aurelio lives depends on that state's law. Whether he reasonably believed the lender used or was known for extortionate collection depends on what he was told and what he had seen. That is the shape of the test: the numbers are the easy part, and the understanding between the two people is the offense.

And if a collector arrives with an implicit threat, section 894 is engaged whether or not any of that is established, because collecting by extortionate means is its own crime.

Pros

• What the arrangement offers a borrower is cash the same day, no application, no credit file, and no question about what the money is for.
• It is available to a borrower whom licensed lenders have already declined, and it asks for no security a licensed lender would have required.

Cons

• The enforcement mechanism is the threat of harm to a person, their reputation or their property, which is what the statute defines and what makes the loan what it is.
• A debt that a state's courts will not enforce is one the lender has no lawful way to collect, which is precisely why the collection turns on something other than law.
• Where the repayment structure leaves the principal untouched, payments can continue indefinitely without the balance moving.
• Anyone who guaranteed the loan is exposed on the same terms as the borrower, and the statute treats them as a debtor for that reason.
• The chapter creates criminal offenses rather than a private right of action, so a borrower's route is to law enforcement rather than to a civil claim under it.