Lake Benton First National Bank v. Watt
Headline: Court upheld that banks charging knowingly usurious interest must forfeit all interest and pay twice the full interest collected, letting borrowers recover double rather than only the excess.
Holding: The Court held that when a bank knowingly charges more than the lawful interest, the statute forfeits the entire interest and allows recovery of twice the whole interest paid.
- Borrowers can recover twice the entire interest paid on knowingly usurious loans.
- Banks that knowingly charge too-high interest face forfeiture and double damages.
Summary
Background
A banking association was ordered by a state court to pay twice the entire interest it had collected after charging a rate above what the law allowed. The bank argued federal law (Revised Statutes sections 5197 and 5198) should let a borrower recover only twice the excess amount over the lawful rate. The statute also says a suit to recover must be brought within two years and may be filed in certain federal or state courts.
Reasoning
The Court read sections 5197–5198 together and found the text unambiguous. Section 5198 says that knowingly taking a greater rate causes a forfeiture of the entire interest the loan carries. The next sentence then allows the person who paid the greater rate to recover “twice the amount of the interest thus paid.” The Court concluded those words refer to the whole interest already forfeited, not just the extra amount above the lawful rate. The opinion explained that treating the recovery as limited to the excess would contradict the clear forfeiture rule and could render the penalty meaningless. The Court noted that federal circuit courts and most state high courts have adopted the same reading.
Real world impact
As a result, borrowers who paid a knowingly usurious rate can sue to recover twice the full amount of interest that was part of the loan, not merely twice the excess. Banks that knowingly exact excessive interest face full forfeiture and potential double liability. The Supreme Court affirmed the state court judgment.
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