St. Mary's Law Journal


The effect of Alamo Lumber Co. v. Gold, and later cases interpreting third party assumption of debt as interest can be perilous to lenders. Lenders are in the business of offering loans to make money. Lenders achieve profit maximization by charging as much interest as possible in the market. Although economic and market factors are always considerations in a lender’s business, in Texas, lenders must also consider harsh usury laws that restrain the maximum amount of chargeable loan interest. Texas defines interest broadly. Statutes define interest as the receipt of compensation for the detention, forbearance or use of money. The expansive definition of interest often results in usury problems when lenders charge separate fees, other than and in addition to interest, and a court considers these fees to be interest. Additionally, facts surrounding the issuance of loans may result in a courting finding usurious interest, even if interest amounts are not excessive. The Texas Supreme court held in Alamo Lumber that when a lender requires a borrower to accept a third party debt to secure a loan, the debt obligation of the third party is a portion of the borrower’s interest making the loan usurious. While the scenario appears to be straight forward, there are several situations where a court could potentially apply Alamo Lumber in holding a loan usurious. Party’s relationship to the debt, financial analysis, independent consideration, defining debt of another, collateral pledge, contingent obligations, savings clauses, and federal regulations may all affect a courts final ruling interpreting loan conditions as interest. Usury penalties in Texas are severe. Penalty may include three times the usurious interest in addition to potentially forfeiting principal. Lenders must be diligent in reviewing the conditions of their loans to ensure avoidance of usurious claims.


St. Mary's University School of Law