Usurious Loans Act, 1918

This 1918 Act, amended by a 1926 amendment act, gives courts extra power to intervene in loan disputes where the interest charged looks excessive and the deal was unfair. Under Section 3, if a court hearing a qualifying suit, for recovery of a loan, enforcement of a related security or agreement, or redemption of security, believes the interest is excessive and the transaction was substantially unfair between the parties, it may reopen the transaction and relieve the debtor of liability for the excessive part, reopen a previously settled account and order repayment of amounts already collected as excessive interest, or set aside, revise or alter any security or agreement tied to the loan, ordering the creditor to compensate the debtor if the security has already been disposed of. The court cannot, however, reopen an agreement that closed prior dealings more than twelve years earlier, or interfere with an existing court decree.

Section 3 explains how a court should judge whether interest is 'excessive': by weighing the risk the lender faced when the loan was made, taking into account all charges such as fees, fines, bonuses and how compound interest was calculated, and the debtor's financial condition and circumstances at the time. The provision notes that the level of interest alone may be enough evidence that a deal was substantially unfair. A bona fide purchaser for value who had no notice of facts entitling the debtor to relief is protected from having the transaction reopened against them.

Section 4 extends the same powers to insolvency proceedings, letting a court apply the same reopening powers when assessing a proof of a loan claim in an insolvency case.