Washington State

Office of the Attorney General

Attorney General

Bob Ferguson

AGO 1980 No. 12 -
Attorney General Slade Gorton


A two-party real estate contract for the sale of residential real property, involving only the owner-seller (whether commercial or private) of the real property and the purchaser thereof, is not subject to the twelve percent per annum interest limitation contained in Washington's usury statute, RCW 19.52.020. 

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                                                                   May 20, 1980 

Honorable Shirley Winsley
State Rep., 28th District
539 Buena Vista Avenue
Fircrest, Washington 98466

Cite as:  AGO 1980 No. 12                                                                                                               

 Dear Representative Winsley: 

            By letter previously acknowledged you requested our opinion regarding the applicability of Washington's usury statute, RCW 19.52.020, to a real estate contract for the sale of residential property.  Specifically, you asked the following two questions: 

            "1) Is a real estate contract for the sale of residential property subject to the 12 percent per annum limitation of RCW 19.52.020?

            "2) Would the answer to the above question be different if the real estate contract were solely between a private buyer and a private seller?  By private buyer and private seller, I mean between persons who are not in the business of selling or buying real property, but who are buying property for personal use and are selling property which has been used for personal use." 

             [[Orig. Op. Page 2]]

            We answer both of the foregoing questions in the negative for the reasons, and subject to the qualification, set forth in our analysis. 


            Washington's usury statute, RCW 19.52.020, provides that: 

            ". . . no person shall directly or indirectly take or receive in money, goods, or things in action, or in any other way, any greater interest, sum or value for the loan or forbearance of any money, goods or things in action than twelve percent per annum: . . ." 

            Clearly, except to the extent that it has been superseded by a federal statute such as 12 U.S.C. § 85 in the case of national banks,1/ this statute applies where the acquisition of residential real property is financed through a purchase money mortgage or (as is more common today) a loan secured by a deed of trust under chapter 61.24 RCW.  In such a case there is a loan of money to the purchaser by either the seller or, more likely, by a third party institutional financier such as a bank, savings and loan association or mortgage company, secured by either a mortgage or a deed of trust executed in favor of the lender by the purchaser.2/   But where, instead, the property in question is acquired under a standard real estate contract,3/ with the seller transferring  [[Orig. Op. Page 3]] only the right of possession and use to the purchaser4/ while retaining legal title as security pending full payment of the agreed purchase price, a different legal issue is presented.  Assuming that the agreed purchase price includes either "interest" as such or some other stated form of time‑price differential, and also that this interest or time‑price differential factor computes out at a rate in excess of the twelve percent per annum maximum permitted by RCW 19.52.020, supra, the question still to be answered is whether that additional charge is ". . . for the loan or forbearance of any money, goods or thing in action . . ." 

            Research has disclosed no Washington cases which have addressed this precise question in the context of an installment contract for the purchase of real property.  There are, however, two cases in which the Washington Supreme Court has examined the question as it relates to the purchase of personal property on the installment plan.  You have cited both of them in your letter and they are, of course, Hafer v. Spaeth, 22 Wn.2d 378, 156 P.2d 408 (1945) andNational Bank of Commerce v. Thomsen, 80 Wn.2d 406, 495 P.2d 332 (1972). 

            We can conceive of no basis for distinguishing between personal and real property insofar as the subject matter of the particular contract is concerned.  Clearly, there is nothing in either case which suggests even the remotest possibility of such a distinction from the standpoint of whether or not RCW 19.52.020,supra, applies.  Let us, therefore, now turn to a somewhat detailed examination of both cases in order to set the stage for our answer to both of your questions.5/ 

             [[Orig. Op. Page 4]]

            Hafer v. Spaeth: 

            This case involved the sale of a piano pursuant to a conditional sales contract.  The basic facts, as summarized by the Court at page 380 were as follows: 

            "On August 4, 1936, R. B. Oslund, doing business as Oslund Piano House, the vendor, entered into a conditional sales contract with one Stanley Headrick, as vendee, wherein the former agreed to sell, and the latter agreed to purchase, a Gulbransen piano for the sum of one hundred seventy-five dollars, to be paid as follows:  thirty dollars cash, upon the signing and delivery of the contract, and the balance in monthly installments of five dollars commencing September 4, 1936, 'with $3.50 handling charge per month or a fraction thereof.' . . ." 

            Since the prescribed $3.50 per month "handling charge" exceeded the maximum rate of interest permitted under the usury statute (RCW 19.52.020,supra) the question presented was whether that statute was applicable.  The Supreme Court held that it was not.  In so ruling the Court began by identifying what it deemed to be the necessary elements of usury, within the purview of the statute, as follows: 

            "The essential elements of usury are:  (1) a loan or forbearance, express or implied; (2) money or its equivalent constituting the subject matter of the loan or forbearance; (3) an understanding between the parties that the principal shall be repayable absolutely; (4) the exaction of something in excess of what is allowed by law for the use  [[Orig. Op. Page 5]] of the money loaned or for the benefit of the forbearance; and, in some jurisdictions, (5) an intent to exact more than the legal maximum for the loan or forbearance."

            Then, the Court said:

            "To determine whether all these essential elements are present, the courts will look through the form of the transaction and consider its substance.  If all the requisites are found to be present, the transaction will be condemned as usurious, but, if any one or more of them are lacking, the parties cannot be charged with a usurious practice.  The cases are uniform in their acceptance of these principles.  66 C.J. 174, Usury, § 65; 27 R.C.L. 208, Usury, § 9.

            ". . .

            "The substructure of a usurious transaction is found in the first two elements above enumerated.  To constitute usury there must be a loan or forbearance of money or its equivalent, and where there is no such loan or forbearance there can be no usury. . . ."

            Next, the Court defined those key terms as follows:

            "The word 'loan' imports an advancement of money or other personal property to a person, under a contract or stipulation, express or implied, whereby the person to whom the advancement is made binds himself to repay it at some future time, together with such other sum as may be agreed upon for the use of the money or thing advanced.  State v. Larson, 119 Wash. 259, 205 Pac. 373; Embola v. Tuppela, 127 Wash. 285, 220 Pac. 789; First Bank of Cordova v. Tjosevig, 138 Wash. 231, 244 Pac. 736; 66 C.J. 181, Usury, § 74; 27 R.C.L. 220, Usury, § 21; 25 Words and Phrases (Perm ed.) 435et seq.

            "The term 'forbearance' as used in the law of usury, signifies a contractual obligation of a lender or creditor to refrain, during a  [[Orig. Op. Page 6]] given period of time, from requiring the borrower or debtor to pay a loan or debt then due and payable.  Murphy v. Agent, 92 Cal. App. 468, 268 Pac. 480; Graybeal Co. v. Cook, 111 Cal. App. 518, 295 Pac. 1088;Johnson Oil Refining Co. v. Smoot, 242 Ill. App. 438; Heilos v. State Land Co., 113 N.J.Eq. 239, 166 Atl. 330; 2 Bouvier, Law Dictionary (3d Rev.) 1254; 66 C.J. 192, Usury, § 100; 17 Words and Phrases (Perm. ed.) 231." 

            And then, applying these two definitions to the facts before it, the Court concluded, first, that there was no "loan" involved in the transaction before it because: 

            ". . . Oslund, the vendor named in the contract, was not engaged in the business of loaning money or chattels, nor did he in this instance loan any money or property to the vendee.  He was regularly engaged in the business of selling pianos, and in this particular transaction he simply contracted to sell to a purchaser a definitely described article of merchandise.  On the other hand, Headrick, the vendee named in the contract, did not seek to obtain a 'loan' of money for general use nor even a loan of a particular piano for temporary use.  He was interested only in the purchase of a specifically described musical instrument.  He did not agree to repay a borrowed sum of money nor did he agree to return the piano at any time.  The transaction contemplated a sale and purchase of personal property upon certain terms and for a specific amount, payable in installments at definite times.  In their respective pleadings, the parties referred to the transaction as a conditional sales contract, and the trial court specifically found that the parties had entered into an agreement of that kind." 

             [[Orig. Op. Page 7]]

            Likewise, the Court then turned to the matter of a "forbearance" and held that: 

            "It is also manifest that, under the foregoing definitions, there was no 'forbearance' involved in the transaction with which we are here concerned.  There was no indebtedness existing between the parties to the conditional sales contract at the time the contract was made, nor did the contract provide for the exaction of any additional consideration for extending the time of payment of any installment thereafter becoming due and payable.  The contract simply provided the terms upon which the vendor was willing to sell, and upon which the purchaser expressed his willingness to buy, the piano.  In other words, the transaction was one which contemplated the sale of a chattel upon specified terms, and not one which exacted a consideration for the extension of payment of an existing or prospective indebtedness." 

            Accordingly, the Court concluded, the transaction before it was not usurious. 

            National Bank of Commerce v. Thomsen: 

            This second case cited in your letter, which was decided in 1972 (or some 27 years later), involved a conditional sales contract covering a 1965 Volkswagen automobile.  Insofar as the question of usury (i.e., the applicability of RCW 19.52.020) is concerned, however, there is once again nothing in the Court's analysis which suggests any possibility for distinguishing it on that factual basis related only to the nature of the property (personal or real) which was the subject of the particular installment contract. 

            There is, however, a pertinent distinction to be noted between theThomsen case andHafer v. Spaeth, supra, in that in the Hafer case‑-although later assignees of both the buyer and seller were the ultimate litigants‑-those two individuals (Mr. Oslund and Mr. Headrick) were, at the outset, the only ones involved.  But inNational Bank of Commerce v. Thomsen,  [[Orig. Op. Page 8]] on the other hand, a third party‑-namely, the plaintiff bank‑-was also present from the very beginning.  And, with that seemingly very much in mind, the Court, in a 6-3 decision, held that the usury statute, RCW 19.52.020, supra, was applicable. 

            Again, in summarizing this case, let us begin by reciting the pertinent facts as stated in the majority opinion6/ at page 407: 

            "The evidence showed that the defendant had gone to Carter Motors, Inc., on a Saturday and had signed an order for the purchase of a new, 1965 Volkswagen automobile.  This order showed that the price would be paid as follows:  a downpayment of $1,000, a trade‑in allowance of $25 and the balance to be financed.  The total amount to be paid exceeded the stated price of the vehicle, $1,999.29, in the amount of $242.15.

            "Later the same day, the defendant paid the $1,000 downpayment and signed a 'conditional sales contract,' which showed the 'time price differential' to be $242.15.  This document provided that payments should be made to the National Bank of Commerce of Seattle, the plaintiff herein, and further provided that payment to anyone other than the National Bank of Commerce should not constitute payment thereunder.  This instrument bore the seal of the plaintiff and was admittedly furnished to the dealer by the plaintiff.  Charts for determining the amount of 'time price differential' were also furnished the dealer by the bank.

            "On the following Monday, the contract was assigned to the plaintiff, which paid the dealer the amount of the purchase price.  This assignment was effected in accordance with the terms of a contract between the dealer and the plaintiff, which provided that the dealer would sell to the plaintiff such 'notes' as might be acceptable to the plaintiff and  [[Orig. Op. Page 9]] that the dealer guaranteed all such 'notes.'  Conditional sale contracts were expressly included within the definition of 'notes.'" 

            Just as inHafer v. Spaeth, supra, it was the additional service charge,7/ there labelled a "handling charge" and here referred to as the "time price differential," which triggered the litigation because it exceeded the twelve percent per annum usury statute limitation.8/   And in holding, this time, for the defendant-purchaser, the Court first made note of theHafer case and said (at pp. 410-413): 

            "It was stated in that opinion that the 'vast majority' of cases dealing with transactions of the kind before the court in that instance had held that such sales do not constitute loans or come within the ban of the law against usury unless it is evident that the transaction, though in outward form a sale and purchase, was but a cloak to hide a usurious loan.

            "While it is perhaps still true that the majority of courts adhere to the view that a conditional sale is not a 'loan or forbearance,' there is now respectable authority to the contrary.  See Annot., 14 A.L.R.3d 1065, 1069 (1967).  Also, the rationale which was commonly used to distinguish sales on credit from loans and which  [[Orig. Op. Page 10]] was set forth in Hafer v. Spaeth, supra, has been subjected to some rather severe criticism.  See, for examples, W. Warren, Regulation of Finance Charges in Retail Instalment [[Installment]]Sales, 68 Yale L. Rev. 839 (1959) and J. Bernstein, Background of a Gray Area in Law:  The Checkered Career of Usury, 51 A.B.A.J. 846 (1965).

            ". . ." 

            But then, however, the Court drew back somewhat, saying:

            "However, we are not confronted in this case with a question which makes it necessary for the court to either affirm or overrule Hafer v. Spaeth, supra.  That case did not involve a purchase which had been financed by the plaintiff.  It is true that there was an assignment of the conditional sale contract, but that assignment was made only for collection purposes and after the purchaser had defaulted." 

            And, with that observation, the Court next stated the question before it as follows: 

            ". . . That question is:  When a purchase is financed by a third party, is the relationship between the purchaser and the financier that of vendee and vendor or that of borrower and lender?"

            Then, in turn, it answered that question by saying:

            "We think the answer is obvious when the question is stated.  The party who furnished the money with which the purchase is made and to whom the purchaser obligates himself to repay that money is a lender.  It follows that the charge which is made for that loan is interest, and the usury statute prohibits the exacting of such interest at a rate greater than 12 per cent per annum.

             [[Orig. Op. Page 11]]

            "All of the facts of this case are consistent with the theory of a loan and inconsistent with a theory of credit sale, except, of course, theform of the transaction.

            "The purchase order showed that the balance of the purchase price (after the cash payment of $1,000, and the trade‑in allowance of $25) was to be financed.  This means that the dealer was not to extend credit to the defendant, but rather was to be paid in full at the time of the sale.  It is true that the dealer did not receive the money until the following Monday, but that was only because the lending institution was closed for the weekend.  The dealer was certain that it would be paid‑-so certain that it exacted from the purchaser a promise to make all his time payments to the plaintiff." 

            Therefore, the Court concluded that the true nature of the transaction, viewed in its entirety, ". . . was a loan . . ." and thus, ". . . the time differential represented interest and the interest charge was greater than that permitted under RCW 19.52.020 . . ."9/ 

             Even this ruling, however, (as above indicated) was less than unanimous.  First, it is to be noted that Justice Hale, who signed the majority opinion, also wrote a special concurrence advocating thatHafer v. Spaeth, supra, should be overruled outright‑-and not merely distinguished (while, in the process, being placed under a substantial cloud by dicta) ". . . because its reported facts do not, in my opinion, support the court's legal conclusion . . ."  But then, to the contrary, the three remaining justices who considered the case‑-in a partially dissenting and partially concurring opinion by Justice Stafford (also signed by Donworth and Weaver, J.J. Pro Tem)‑-took the view that although  [[Orig. Op. Page 12]] Mr. Thomsen, the purchaser, should prevail, he should do so solely on the basis of technical infirmities in the contract formation process under the pertinent provisions of the Retail Installment Sales Act,supra, and not because of any problem with the rate or amount of the specified time‑price differential.  In so urging those three justices said (80 Wn.2d at 422): 

            "The legislative history of the Retail Installment Sales Act has served to emphasize, not abrogate, the difference between 'loan' and 'sales,' 'interest' and 'service charges' with which Hafer was concerned.  In light of circumstances existing at the time the instant contract was executed, we should not overruleHafer v. Spaeth, supra." 

            We should also observe, parenthetically, before proceeding further that although the character (real v. personal) of the property involved makes no difference from the standpoint of whether or not RCW 19.52.020 (the usury law) applies to a particular transaction, it quite definitely does make a difference in terms of the applicability of chapter 63.14 RCW, the Retail Installment Sales Act.  That act, which also now contains a 12 percent per annum limit on any service charge or time differential payment, applies by its own terms only to the sale of personal property.  See,e.g., RCW 63.14.010(1) and (6).

             Summary and Conclusion: 

            What, then, does this all mean in terms of your present inquiry regarding the applicability of RCW 19.52.020, supra, to such a ". . . real estate contract for the sale of residential property . . ." as is referred to in your letter?  Candidly, it means that the future course which the Court may take is not entirely predictable.  In this regard it is further to be observed that although National Bank of Commerce v. Thomsen, supra, was decided only eight years ago, only two signers of the then six-judge majority opinion (its author, Justice Rosellini, and Justice Wright)‑-along with Justice Stafford, the author of the partial concurrence and partial dissent‑-remain members of the Supreme Court today.  The six other members of the Court at this time are Chief Justice Utter and Justices Brachtenbach, Hicks, Horowitz, Dolliver and Williams, none of whom have yet had an occasion to speak on either side of the question. 

             [[Orig. Op. Page 13]]

            But bearing this point in mind, another factor which concerns us is that quite probably a number of real estate contracts are now in effect which carry interest (or time‑price differential) charges that, prompted by spiralling interest rates in the recent past, exceed the 12 percent limit fixed by RCW 19.52.020,supra ". . . for the loan or forbearance of any money, . . ."  And to some extent, at least, those contracts may well have been entered into by the parties in reliance on theHafer case reasoning that the usury law is inapplicable.  Should this office, in the absence of a clear-cut holding to the contrary by the Court, now cast a cloud over those contracts through the issuance of an attorney general's opinion declaring them nevertheless subject to that usury limit?  We think not. 

            For these reasons, therefore, having found no legitimate basis for distinguishing the case because of either the nature of the property involved (personal v. real) or the status of the seller (private v. commercial), we take the position thatHafer v. Spaeth, supra, governs insofar as both of your questions are concerned and should be viewed as continuing to do so until and unless it is squarely overruled‑-at least in the absence (in addition to the buyer and seller) of a third party financier performing the further role played by the Court in National Bank of Commerce v. Thomsen, supra.  We thus answer your questions qualifiedly in the negative. 

            We trust that the foregoing will be of assistance to you. 

Very truly yours,
Attorney General 

Deputy Attorney General

                                                         ***   FOOTNOTES   *** 

1/Accord, AGO 1980 No. 11, copy enclosed, at pp. 2-7; and see also, so much of H.R. 4986 as amends 12 U.S.C. § 1811, et seq., relative to other federally-insured financial institutions. 

2/But note, however, the non-availability of the defense of usury under RCW 19.52.080 in the case of transactions ". . . exclusively for commercial or business purposes . . ."

3/Although the forms of such contracts may vary, slightly, those in general use by both professional realtors and private individuals selling their own homes (obtained, in the latter instance, mainly from title insurance companies) are substantially similar.  For the record in relation to this opinion, we have obtained, and are appending hereto, a typical form real estate contract of the type with which you are concerned.

4/See, Cascade Security Bank v. Butler, 88 Wn.2d 777, 567 P.2d 631 (1977), prospectively overruling Ashford v. Reese, 132 Wash. 649, 233 Pac. 29 (1925) insofar as it is inconsistent, for the legal characterization of such a vendee's interest. 

5/Likewise, we can perceive no basis for distinguishing between what you have referred to in your letter as a transaction ". . . between a private buyer and a private seller . . ." and one involving persons who are ". . . in the business of selling and buying real property, . . ."  We will therefore treat both of your questions as raising a single issue‑-i.e., the applicability of RCW 19.52.020 to a real estate contract without regard to the status of the seller.  In this latter respect we assume, however, that we are still dealing only with a two-party transaction between a seller who owns the subject residential real property and a purchaser who desires to buy it‑-with no third party financier also being involved in the consummation of the deal along the lines ofNational Bank of Commerce v. Thomsen, supra.  We will have more to say about this latter distinction later in this opinion. 

6/Written by Justice Rosellini and concurred in by then Chief Justice Hamilton and Justices Finley, Hunter, Hale and Wright. 

7/Cf., RCW 63.14.010(8). 

8/At the time of Mr. Thomsen's purchase of the Volkswagen from Carter Motors., Inc., in 1965 there was, notably, no limitation on the service charge which could be imposed in connection with the retail installment contract under chapter 63.14 RCW, the Retail Installment Sales Act of 1963.  Subsequently, an 18 percent per annum limit was fixed by the legislature and then that limit was reduced to 12 percent per annum through the initiative process.  See, RCW 63.14.120(3)(d) as amended by § 7, chapter 234, Laws of 1967 and, later, by § 2, chapter 2, Laws of 1969 (Initiative Measure No. 245). 

9/80 Wn.2d at 415.