The Honorable Bobby G. Newman State Representative P.O. Box 52 Smackover, Arkansas 71762-0052
Dear Representative Newman:
This is in response to your request for an opinion on the following two questions:
1. Is it lawful for a state chartered Arkansas bank to make a fixed rate loan in Arkansas at an interest rate higher than 5% above the Federal Reserve Discount Rate (currently 8%), if the loan is for poultry houses and is guaranteed 90% by the Farmer's Home Administration?
2. If the above type loan was on the adjustable rate, could the bank safely raise the adjustable rate higher than the original 8% presently allowed, as market rates increase, without fear of being accused of charging more than the maximum lawful rate since this increased rate would be higher than the original rate on the note?
It is my opinion that the answer to your first question is "no." This was the conclusion of Op. Att'y Gen. No. 92-235, a copy of which is enclosed. Cf. also Op. Att'y Gen. No. 92-150 (discussing the preemption of Arkansas usury rates on direct Farmers Home Administration loans and state bank loans included in "Farmer Mac" guaranteed pools).
It is my opinion that the answer to your second question is also "no." Absent federal preemption of the applicable Arkansas usury rates, variable rate loans which are adjusted upward from the initial maximum rate agreed upon at the time of entering the contract are usurious. See generally, Galchus, Martin, and Vibhatur, A History of Usury Law in Arkansas: 1836-1990, 12 UALR L.J. 695, n. 201.
The foregoing opinion, which I hereby approve, was prepared by Deputy Attorney General Elana C. Wills.
Sincerely,
WINSTON BRYANT Attorney General
WB:cyh
Enclosure