Many people, especially in these difficult times, look to banks and other financial institutions for loan financing. Often, due to financial constraints and at their own peril, people fail to get proper advice on loan agreements hastily entered into in order to defray immediate expenses. But this can often have huge implications for the debtor as there are important reasons for obtaining legal advice in these circumstances, not least of which is ensuring that you understand the interest provisions in a loan agreement.
Although the Moneylending Act prohibits the charging of compound interest whether directly or indirectly, in any contract for the loan of money, banks and financial institutions are notably exempt from its provisions. A bank in Jamaica may therefore insert an express provision for the payment of compound interest in a loan agreement. However, even more elementary is the fact that there is an established banking practice of capitalising interest at periodic rests which properly allows banks to compound interest irrespective of any express provision in the loan agreement.
The practice developed long ago in England when usury laws with provisions similar in their intent to those in the Moneylending Act applied to banks up until they were repealed in 1854. Before their repeal, however, banks were allowed by the courts to circumvent the usury laws by the fiction of a series of staccato agreements whereby, at each rest, it was presumed to have been agreed that the interest then due could become principal and carry interest. The interpretation and wording survived the repeal of the usury laws and became a practice of capitalising interest at periodic rests, which continues today. The legal reasoning, as stated in 1863, is that the charging of compound interest is the privilege of a banker founded on a plain ground of equity – that interest ought to be paid as stipulated and, if not paid, the debtor becomes a debtor for the new amount unpaid, as a principal sum itself bearing interest.
In a 2004 Jamaican appeal to the Privy Council it was held that the practice of capitalising unpaid interest had been established by the bank in question. The bank in that case was therefore allowed to charge compound interest, even where express reference to compound interest or interest paid at periodic rests was lacking in its agreement with its customer, based on the practice itself.
Ignorance of the law is no defence and failing to obtain legal advice is a decision that each person takes at his own risk. The only way to rest assured of your rights and obligations under a legal document is to obtain proper advice.
Alexis Robinson is a Partner at Myers, Fletcher and Gordon, and is a member of the firm’s Litigation Department. She may be contacted at alexis.robinson@mfg.com.jm or through the firm’s website www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.
