If I live in Texas and the borrower is in California, which state's usury law applies?

It depends on the choice-of-law clause in the note, where the loan is "made," where the borrower lives and signs, and the strength of each state's public policy. Most courts will enforce a reasonable choice-of-law clause if at least one of the states has a substantial connection to the loan. California has strong consumer protections that may override a Texas choice-of-law for a consumer loan to a California resident.

Can I just pick the most lender-friendly state?

Not always. The chosen state must have a "substantial relationship" to the loan or the parties (lender located there, loan documents signed there, payments mailed there). Picking Delaware when neither party has any connection is unlikely to hold up. Pick a state where you actually do business or where the loan is functionally based.

Does the borrower's state usury cap always win?

Not always, but often, especially when the borrower is a consumer. State consumer-protection laws are usually treated as "fundamental public policy" that overrides a choice-of-law clause. Commercial loans (business borrowers) get more deference to the chosen law.

What about the federal preemption for banks?

Federally chartered banks (national banks, federal savings banks) can "export" their home-state interest rate to borrowers in any state under the Marquette doctrine and Section 521 of DIDA. This is why your credit card from a Delaware-based bank can charge 29 percent even in a state with lower caps. Private lenders do not get this benefit.

Should I get a lawyer for an out-of-state note?

For loans above $50,000 or where the rate is close to either state's usury cap, yes. The choice-of-law analysis is genuinely complicated and getting it wrong can void the interest (or the entire loan in some states). For small intra-family loans, a clear choice-of-law clause and a rate well below both states' caps usually suffices.

Out-of-State Borrower or Lender: Whose Usury Law Applies?

A loan between people in different states is two states\' worth of rules in one piece of paper. Which one wins depends on what the note says, what each side actually did, and (sometimes) how strong each state feels about the issue. Here is how courts think about it and how to draft so the answer is not a surprise.

The starting point: choice of law

A well-drafted note includes a choice-of-law clause: "This Note is governed by the laws of the State of [X]." Most states honor that choice if:

The chosen state has a substantial relationship to the parties or the transaction, OR
There is some other reasonable basis for the parties\' choice

"Substantial relationship" is satisfied when a party lives there, the note is signed there, payments are mailed there, or the lender does business there. Picking a state with no connection is unlikely to hold.

The override: fundamental public policy

Even when the choice-of-law clause is otherwise valid, a court can ignore it if applying the chosen law would violate a fundamental public policy of a state with a "materially greater interest" in the transaction. Usury caps protecting consumers are often treated as fundamental public policy.

Practical translation: if you are a Texas lender lending to a California consumer at 22 percent, your Texas choice-of-law clause is at risk because California\'s 10 percent consumer cap reflects a strong public policy. If both parties are commercial actors, courts give more weight to the chosen law.

What "the loan was made in [State X]" actually means

If the note has no choice-of-law clause, courts use traditional conflict-of-laws rules. Key factors:

Where the borrower signed the note (often controls)
Where the lender is located
Where the funds were transferred from
Where payments are sent
Where the collateral is located (if secured)
Where the borrower lives

For a borrower in California signing a note that is mailed to a Texas lender, with funds wired from Texas, courts often apply Texas law. For the same setup but the borrower wires the signed note from California where they live, California law is more likely.

Federal preemption: the bank loophole

Federally chartered banks and federal credit unions can charge the highest rate allowed in their home state to borrowers in any state. That is why a credit card issued by a Delaware-based national bank can charge 29 percent in California (where the state cap is 10 percent on private loans).

Private lenders, individuals, family members, and most state-chartered finance companies do not get this benefit. The state law analysis above applies.

How to draft a clean cross-border note

Pick a state where at least one party actually has a real connection
State the choice of law clearly
State where the note is "made" (often the lender\'s state)
State where payments must be made (often the lender\'s state)
Set the rate well below the lower of the two states\' caps to remove all doubt
For consumer borrowers, comply with the borrower\'s state law as a defensive measure

Examples

Family loan, Mom in Florida to son in New York

Both states have high private-loan caps (Florida 18 percent on loans over $500,000, New York 16 percent for non-corporate loans). A 5 percent intra-family rate is well below both. Choice-of-law clause for Florida (where Mom lives, where money came from). Note is fine.

Business loan, Texas LLC to California LLC at 14 percent

Texas allows up to 28 percent for business loans. California\'s usury cap excludes loans to certain commercial borrowers (LLCs typically exempt). Choice-of-law clause for Texas. With both being LLCs, California likely defers to the Texas choice. Note is enforceable.

Private lender in Delaware to consumer in Arkansas at 17 percent

Arkansas has a constitutional usury cap of 17 percent for consumer loans (formerly stricter). Delaware has no general usury cap. Even with a Delaware choice-of-law clause, a court hearing the case in Arkansas (the consumer\'s state) is likely to apply Arkansas law as a fundamental policy, especially if the lender solicited the borrower in Arkansas. Stay safely below 17 percent.

The safe-harbor strategy

If you are unsure which state\'s law will apply, draft the note to comply with the stricter of the two. Pick the lower usury cap. Use the more protective consumer notices. The slight cost in maximum interest is far less than the cost of voiding the note entirely.

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