Opinion ID: 1231670
Heading Depth: 3
Heading Rank: 1

Heading: Finance Charge and Interest.

Text: We first consider the Board's claim that McKittrick violated the Iowa usury statutes. The Board maintains that McKittrick was not permitted to charge interest in excess of the maximum amount set forth in Iowa Code section 535.2(3) (2003), without complying with the notice and disclosure provisions of the state and federal laws governing consumer credit transactions. Iowa usury law limits the rate of interest that may be charged in a written agreement for the payment of interest to a variable amount based on the rates of government notes and bonds. [1] Id. § 535.3( a ). At the time relevant to this action, the maximum rate of interest was 8.75%. See July 19, 1995 Iowa Admin. Bull. at 93. The usury law, however, does not apply to finance charges on accounts receivable. Under section 535.11, a creditor may impose a finance charge on the unpaid balance of an account receivable, not exceeding certain rates permitted under the consumer credit code, if the creditor gives notice as provided under the statute. Iowa Code § 535.11(1). If the transaction is subject to the Truth in Lending Act (TILA), written notice must be given as required under the Act. Id. § 535.11(2)( a ). If the transaction is not subject to the TILA, notice must be given when the debt arises and must be contained in the invoice or bill of sale. Id. § 535.11(2)( b ). For an open account, this notice must be given when credit is initially extended. Id. Notwithstanding, section 535.11 exempts parties who have agreed in writing for a different finance charge or rate of interest. Id. § 535.11(1). The Board claims McKittrick was not permitted to impose a finance charge in excess of 8.75% because she failed to give notice to Walker as required under the statute. However, the written fee agreement entered into between McKittrick and Walker, providing for a finance charge on accounts receivable, satisfied the statute and made further notice unnecessary. Moreover, although lawyers are not necessarily exempt from the provisions of the consumer credit code and the TILA, the requirements of those provisions did not apply under the circumstances of this case. See Riethman v. Berry, 287 F.3d 274, 277-79 (3d Cir.2002) (law firm not subject to the TILA where client had no right to defer payment of the bill); Ault v. Gen. Prop. Mgmt. Co., 683 P.2d 988, 991 (Okla.Ct.App.1984) (Uniform Consumer Credit Code applies to credit sales of legal services by an attorney who regularly extends credit). However, the record supports a finding that McKittrick compounded interest and, at times, imposed interest on charges for services performed before those charges were billed or before they were due. Compound interest is interest on interest. 47 C.J.S. Interest & Usury § 3, at 21 (1982). The accrued interest is added to the principal sum, which is then considered the new principal for the calculation of interest for the next period. Id. Compound interest was disfavored at common law as harsh and oppressive because it has the effect of unduly accelerating the accumulation of debt. Henderson v. Camden County Mun. Util. Auth., 176 N.J. 554, 826 A.2d 615, 619 (2003). Consequently, compound interest is not permitted absent an agreement between the parties. See Power Equip., Inc. v. Tschiggfrie, 460 N.W.2d 861, 863 (Iowa 1990). Moreover, our legislature does not permit a finance charge on accounts receivable to be compounded. Iowa Code § 535.11(6). The Board established that McKittrick compounded the finance charge imposed in this case. This resulted in the imposition of an illegal finance charge, in violation of DR 1-102(A)(6).