36

other indorsers.35 Like any other person who negotiates a negotiable instrument, one who procures such paper to be discounted warrants the genuineness of prior signatures. If the holder procures the discount of paper by false representations as to the solvency of the maker, the bank may rescind the discount and charge back the credit.3

37

RATE OF INTEREST-USURY

61. IN GENERAL-Unless a different rate is provided for banks, they are subject to the general laws of the state in which they are incorporated or do business, fixing the rate of interest that may be charged for the loan of money and prescribing penalties for usury.

62. NATIONAL BANKS-A national bank may charge on loans and discounts interest at the rate allowed by the laws of the state where the bank is located; but if a higher rate is there allowed to banks of issue, that rate may be charged, and if no rate is there fixed, the bank may charge a rate not exceeding 7 per cent. Knowingly charging in excess of the rate allowed works a forfeiture of the entire interest; and if greater interest has been actually paid, the person who paid it may recover back twice the amount of the interest paid.

35 Lake v. Artisans' Bank, 17 Abb. Prac. (N. Y.) 232. See "Banks and Banking," Dec. Dig. (Key. No.) § 183; Cent. Dig. 88 701-705.

36 President, etc., of Cabot Bank v. Morton, 4 Gray (Mass.) 156. See, also, State Bank v. Fearing, 16 Pick. (Mass.) 533, 28 Am. Dec. 265. See "Banks and Banking," Dec. Dig. (Key No.) § 183; Cent. Dig. 88 701-705.

37 Bank of Antigo v. Union Trust Co., 50 Ill. App. 434; Kling v. Irving Nat. Bank, 21 App. Div. 373, 47 N. Y. Supp. 528; Flatow v. Jefferson Bank, 135 App. Div. 24, 119 N. Y. Supp. 860 See "Banks

Limitation as to Rate in General

In most states there are usury laws prescribing the rate of interest that may lawfully be charged for the loan or forbearance of money. These laws apply to loans by banks as well as to others, unless the rate which may be charged by banks is otherwise regulated by general laws or by charter.38 Usury laws, so far, at least, as they are of general application, do not as a rule apply to the purchase of negotiable paper at a discount greater than the legal rate of interest; the transaction being a sale, and not a loan.39 Laws which provide the rate of interest that may lawfully be charged by banks ordinarily in terms cover discounts as well as loans.40

What Constitutes Usury

If upon a loan or discount more than the lawful rate is intentionally reserved, the transaction, whatever form is given to it, is usurious. Thus, where upon a discount in lieu of money the bank delivered its post notes, payable at a future. day without interest, the notes being at a discount in the mar

and Banking," Dec. Dig. (Key No.) §§ 183, 186; Cent. Dig. §§ 701705, 719.

38 Bank of Alexandria v. Mandeville, Fed. Cas. No. 850, 1 Cranch, C. C. 552; Lumberman's Bank v. Bearce, 41 Me. 505; Ritenour v. Harrison, 57 Mo. 502; Creed v. Commercial Bank of Cincinnati, 11 Ohio, 489; Stribbling v. Bank of Valley, 26 Va. 132; Rock River Bank v. Sherwood, 10 Wis. 230, 78 Am. Dec. 669; Durkee v. City Bank of Kenosha, 13 Wis. 216.

Authority in a charter to charge such rate as may be agreed upon does not authorize charging a rate unlawful for others. Tishimingo Sav. Inst. v. Buchanan, 60 Miss. 496; Simonton v. Lanier, 71 N. C. 498. See "Banks and Banking," Dec. Dig. (Key No.) § 181; Cent. Dig. §§ 686-700.

39 Clark, Contracts (2d Ed.) 271.

It seems, however, that such laws apply to discounts by way of purchase by banks. See Salmon Falls Bank v. Leyser, 116 Mo. 51, 22 S. W. 504; Smith v. Exchange Bank of Pittsburg, 26 Ohio St. 141. But see Bank of Louisiana v. Briscoe, 3 La. Ann. 157. See "Banks and Banking," Dec. Dig. (Key No.) § 181; Cent. Dig. $$ 686-700.

40 Post, p. 241.

41 Clark, Contracts (2d Ed.) 271.

45

ket, the transaction was usurious.*2 So, where the bank took a note payable in coin for the face amount of depreciated state bank notes loaned, whereby the bank obtained a greater profit than the lawful rate.43 There must, however, be an intention to charge the greater rate." Reserving a higher rate under the guise of a commission is usurious.* But the bank may deduct in addition the current exchange upon discount of a bill payable in another place. A bank may deduct in advance legal interest upon the amount evidenced by the paper; in other words, it may take the customary bank discount, although it actually receives thereby a rate slightly in excess of the legal rate of interest, the custom being established and universally recognized."

46

42 Gaither v. Farmers' & M. Bank, Use of Corcorran, 1 Pet. 44, 7 L. Ed. 43.

Otherwise where it delivers its bank bills, although they are at a discount. Maury v. Ingraham, 28 Miss. 171. See "Banks and Banking," Dec. Dig. (Key No.) § 181; Cent. Dig. §§ 686–700.

43 Bank of United States v. Owens, 2 Pet. 527, 7 L. Ed. 508. See, also, Bank of State of North Carolina v. Ford, 27 N. C. 692. See "Banks and Banking," Dec. Dig. (Key No.) § 181; Cent. Dig. §§ 686700.

44 Bank of United States v. Waggener, 9 Pet. 378, 9 L. Ed. 163; Timberlake v. First Nat. Bank (C. C.) 43 Fed. 231. Otherwise under some statutes. Carolina Sav. Bank v. Parrott, 30 S. C. 61, 8 S. E. 199. See "Banks and Banking," Dec. Dig. (Key No.) § 181; Cent. Dig. 88 686-700.

45 Union Nat. Bank of Chicago v. Louisville, N. A. & C. Ry. Co., 145 Ill. 208, 34 N. E. 135; Olmstead v. New England Mortg. Sec. Co., 11 Neb. 487, 9 N. W. 650. See "Banks and Banking," Dec. Dig. (Key No.) § 181; Cent. Dig. §§ 686–700.

46 President, etc., of Portland Bank v. Storer, 7 Mass. 433; Farmers' Bank v. Garten, 34 Mo. 119; Marvine v. Hymers, 12 N. Y. 223; International Bank v. Bradley, 19 N. Y. 245; Central Bank of Wisconsin v. St. John, 17 Wis. 157. See, also, Farmers' & Mechanics' Bank v. Parker, 37 N. Y. 148; post, p. 242. See "Banks and Banking," Dec. Dig. (Key No.) § 181; Cent. Dig. §§ 686-700.

47 Fowler v. Equitable Trust Co., 141 U. S. 384, 12 Sup. Ct. 1, 35 L. Ed. 786; Bank of Alexandria v. Mandeville, Fed. Cas. No. 850, 1

Effect of Usury

By

The effect of usury differs under different statutes. some statutes or charters the contract on which the usury is charged is void.48 In such case the usury defeats an action upon paper discounted, even against a holder in due course, unless an exception is made by the statute in his favor. Under other statutes a usurious contract is not void, but the entire interest is forfeited. Such is the provision of the National Bank Act." 50 Under other statutes only the excess of the interest charged is forfeited, and the legal amount is nevertheless recoverable.51

49

Where a bank makes a loan at a rate prohibited by its charter or the law under which it is incorporated, it cannot recover in the courts of that state more than the lawful rate, although the contract was made in another state where the higher rate was authorized; 52 but in cases where action has been brought

Cranch, C. C. 552; Newell v. National Bank of Somerset, 12 Bush (Ky.) 57; Warren Deposit Bank v. Robinson's Adm'rs (Ky.) 35 S. W. 275; President, etc., of Maine Bank v. Butts, 9 Mass. 49; President, etc., of Agricultural Bank v. Bissell, 12 Pick. (Mass.) 586. Cf. Branch Bank at Mobile v. Strother, 15 Ala. 51. See "Banks and Banking," Dec. Dig. (Key No.) § 181; Cent. Dig. §§ 686-700.

48 See Bank of United States v. Owens, 2 Pet. 537, 7 L. Ed. 508; Youngblood v. Birmingham Trust & Sav. Co., 95 Ala. 521, 12 South. 579, 20 L. R. A. 58, 36 Am. St. Rep. 245; Seneca County Bank v. Lamb, 26 Barb. (N. Y.) 595; Miami Exporting Co. v. Clark, 13 Ohio, 1. See “Banks and Banking,” Dec. Dig. (Key No.) § 181; Cent. Dig. §§ 686-700.

49 See President, etc., of Planters' Bank of Mississippi v. Sharp, 4 Smedes & M. (Miss.) 75, 43 Am. Dec. 470. See "Banks and Banking,” Dec. Dig. (Key No.) § 181; Cent. Dig. §§ 686-700.

50 Post, p. 239.

51 See McLean v. LaFayette Bank, Fed. Cas. No. 8,888, 3 McLean, 587; Veazie Bank v. Paulk, 40 Me. 109; Chafin v. Lincoln Sav. Bank, 7 Heisk. (Tenn.) 499. See "Banks and Banking," Dec. Dig. (Key No.) § 181; Cent. Dig. §§ 686–700.

52 Ewing v. Toledo Sav. Bank, 43 Ohio St. 31, 1 N. E. 138; Farmers' Bank v. Burchard, 33 Vt. 346.

A note dated and signed in Tennessee, and payable in Chicago,

in the state where the contract was made, it has been held that the rate there allowed could be recovered. 53

Interest Chargeable by National Banks

By the provisions of the National Bank Act, a national bank may charge on any loan or discount, or on any note, bill of exchange, or other evidences of debt, interest at the rate allowed by the laws of the state where the bank is located, except that if by the state law a different rate is limited for banks of issue that rate shall be allowed for national banks in the state, and if no rate is fixed by the state law the bank may charge a rate not exceeding 7 per cent., which may be taken in advance for the time the evidence of debt has to run. Knowingly charging a higher rate than is allowed, as above, works a forfeiture of the entire interest; and if the greater interest has been paid, twice that amount may be recovered back. 54

55

The above provisions, imposing penalties upon national banks for taking usury, supersede state laws upon the subject.5 Therefore, while they provide that the rate of interest chargeable is that allowed by the state law, the provisions of the

Ill., and forwarded by the makers to the payees there, and discounted there by a bank, was governed by the laws of Illinois relating to usury. Buchanan v. Drovers' Nat. Bank of Chicago, 55 Fed. 223, 5 C. C. A. 83. See "Banks and Banking," Dec. Dig. (Key No.) § 181; Cent. Dig. §§ 686–700.

53 Hitchcock's Heirs v. United States Bank of Pennsylvania, 7 Ala. 386; Frazier v. Willcox, 4 Rob. (La.) 517; Erwin v. Lowry, 6 Rob. (La.) 28; Knox v. Bank of United States, 26 Miss. 655. See "Banks and Banking," Dec. (Key No.) § 181; Cent. Dig. §§ 686-700.

54 Rev. St. U. S. §§ 5197, 5198 (U. S. Comp. St. 1901, p. 3493). 55 Farmers' & M. Nat. Bank v. Dearing, 91 U. S. 29, 23 L. Ed. 196; Davis v. Randall, 115 Mass. 547, 15 Am. Rep. 146; Hintermister v. First Nat. Bank of Chittemango, 64 N. Y. 212 (First National Bank of Whitehall v. Lamb, 50 N. Y. 95, 10 Am. Rep. 438, and Farmers' Bank of Fayetteville v. Hale, 59 N. Y. 53, having been overruled by Farmers' & M. Nat. Bank v. Dearing, supra). Sce "Banks and Banking," Dec. Dig. (Key No.) § 270; Cent. Dig. §§ 1023