Legal Definitions - extortionate credit transaction

An extortionate credit transaction refers to a loan or credit agreement where the terms are so grossly unfair and unreasonable that they are designed to exploit the borrower, often involving extremely high interest rates, hidden fees, and coercive or threatening methods to ensure repayment. These transactions typically target individuals or businesses in desperate financial situations who cannot access credit through legitimate channels.

Here are some examples illustrating an extortionate credit transaction:

• Imagine a small, family-owned bakery struggling to make ends meet after a sudden increase in ingredient costs. Unable to secure a traditional bank loan due to their low credit score, the owner approaches an informal lender. The lender offers a $10,000 loan, but demands repayment of $15,000 within one month, along with a clause stating that if any payment is missed, the lender will take ownership of the bakery's essential equipment. The lender also makes veiled threats about "unpleasant consequences" if the terms are not met.

  This is an extortionate credit transaction because the effective interest rate for a single month is an exorbitant 50% ($5,000 on $10,000). The demand for the bakery's equipment as collateral and the implied threats of harm or property seizure constitute coercive tactics, exploiting the owner's desperate need for funds.

• Consider an individual who urgently needs to pay for emergency car repairs to get to work, but has no savings. A local "cash advance" service offers a $700 loan, requiring repayment of $1,200 in two weeks. The agreement includes a clause that if the borrower defaults, the lender will contact their employer and family members, and will send representatives to their home daily until the debt is settled, adding a $100 daily late fee.

  This exemplifies an extortionate credit transaction because the required repayment of $1,200 for a $700 loan in just two weeks represents an extremely high and unreasonable cost of credit. The threats to involve the borrower's employer and family, along with daily home visits and excessive late fees, are coercive and intimidating methods used to enforce repayment.

• A recent immigrant, unfamiliar with local banking systems and facing unexpected medical bills, is approached by someone offering financial assistance. The individual offers to pay the $2,000 medical bill directly, but requires the immigrant to sign a document agreeing to repay $4,000 over the next three months, plus an additional "processing fee" of $500. The lender also holds onto the immigrant's passport as "security" until the full amount is repaid, implying that it will not be returned if payments are missed.

  This constitutes an extortionate credit transaction because the borrower is required to pay more than double the original amount ($4,500 for a $2,000 debt) in a short period, which is an unconscionably high cost of credit. Holding the borrower's passport and implying its non-return if payments are missed is a clear act of coercion, exploiting the borrower's vulnerability and lack of understanding of the local legal system.