The Supreme Court has made a ruling helpful to those who have borrowed money from consumer and “shoko” (industry and commerce) loan firms — which lend operating funds to small companies — as well as from illegal loan sharks. The ruling will affect the practice of having borrowers pay interest rates above the level allowed by law if they “voluntarily” agree to do so.

This strange practice has been possible because two laws set different maximum interest rates for money lenders. The Law Concerning the Regulation of Interest sets maximum annual interest rates at 15 to 20 percent, depending on the size of loans. But it does not stipulate criminal punishment for violators. On the other hand, the Law Concerning the Regulation of Receiving Capital Subscriptions, which does provide for criminal punishment, caps annual interest rates at 29.2 percent.

The two different laws create a gray zone. An interest rate above the level set by the interest regulation law can be applied as long as it is below the level set by the capital subscription law. A third law, the Law Concerning Restrictions on Money Lending, allows money-lending firms to charge an interest rate in the gray zone if certain conditions are met, including the borrower’s “voluntary” consent to pay it. Therefore it has been almost customary for consumer and shoko loan firms to charge gray-zone interest rates.

However, the Supreme Court has ruled that the portion of an interest rate above the maximum level set by the interest regulation law is invalid if there is “virtual” coercion — even if a clear case of coercion does not exist.

A money-lending company in Kyoto had filed a lawsuit against a self-employed person in Tottori Prefecture, to whom it had lent 3 million yen at an annual interest rate of 29 percent, which is above the maximum allowed under the interest regulation law. Because the borrower was unable to pay back the debt by deadlines established under an installment plan, the company asked the Tottori District Court to order the borrower to pay the remaining sum of 1.89 million yen in one installment, in accordance with a special clause in the contract.

The clause said if the borrower failed to pay the principal or interest by repayment deadlines, he must pay off the remaining debt in one installment. Since the clause led the borrower to believe that a failure to pay the excess “gray zone” interest obliged him to pay off the remaining debts in one installment, the Supreme Court ruled that the clause “virtually” coerced the borrower to pay the excess interest, which he originally did not have to pay. Therefore, the court ruled the special clause invalid, meaning that if a contract includes such a clause a money lender cannot charge excess interest.

One of the conditions for charging excess interest is that a money lender must give a legally specified receipt every time a borrower makes a repayment. The Cabinet Office had issued a directive that the receipt must bear only the number of the loan contract. But the Supreme Court ruled that the directive was in violation of the Law Concerning Restrictions on Money Lending Business, and that more details must be noted on the receipt.

The high court’s ruling will have a big impact on ordinary people because it comes at a time when up to 2 million people across the nation are said to hold multiple debts. Last fall, about 2,500 multiple debtors in 31 prefectures filed lawsuits against about 100 consumer-loan companies, calling for a refund of the excess interest they had paid.

The ruling will lead to similar lawsuits. After the high court ruling, a major consumer-loan company decided to drop the special clause from existing loan contracts, thus giving up the right to insist that borrowers pay off the debts in one installment if they fall into arrears. But the excess interest will stay.

In 1999, coercive debt-collection methods used by shoko loan firms came to light, rousing public criticism against money lenders. A subsequent revision of the capital subscription law lowered the allowable maximum interest rate from an annual 40.004 percent to 29.2 percent. Punishment under the law now is imprisonment of up to five years or a fine of up to 10 million yen for individuals and a fine of up to 100 million yen for companies.

Despite these measures, violations by lenders are increasing, with licensed lenders accounting for about 40 percent. The number of multiple debtors is also on the rise. Still, the money-lending industry is calling for the abolition of interest-rate caps.

It is true that some debtors have only themselves to blame for their problems. The government, however, should lower the allowable maximum interest rate under the capital subscription law so that there will be no room for gray-zone interest.

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