A critical aspect of debt collection in any jurisdiction is the regulation of interest rates and associated charges to protect borrowers from usurious lending practices. In Japan, the Interest Limitation Act (利息制限法 - Risoku Seigen Hō) serves this fundamental protective role. Consequently, Japan's Servicer Law (the Act on Special Measures Concerning Business of Management and Collection of Claims) incorporates specific and stringent rules dictating how licensed servicer companies (債権回収会社 - saiken kaishū kaisha) must handle "Specified Monetary Claims" where the original contractual terms for interest or default damages might have exceeded these statutory ceilings.

Understanding these regulations is vital for anyone involved with Japanese debt, as it directly impacts the enforceable value of claims and dictates the conduct expected of licensed servicers.

A Primer on Japan's Interest Limitation Act (ILA)

For U.S. legal and business professionals, it's helpful to have a basic understanding of the ILA's framework:

• Purpose: The primary objective of the ILA is to protect borrowers by setting maximum permissible interest rates on monetary loans. It aims to prevent lenders from imposing excessively high interest burdens.
• Maximum Interest Rates: The ILA establishes a tiered system of maximum annual interest rates based on the principal amount of the loan:
  • For principal amounts less than JPY 100,000: 20% per annum.
  • For principal amounts of JPY 100,000 or more but less than JPY 1,000,000: 18% per annum.
  • For principal amounts of JPY 1,000,000 or more: 15% per annum.
• Effect of Exceeding Limits: Any portion of an interest agreement that stipulates rates above these statutory maximums is generally considered void (無効 - mukō) under Japanese civil law. The lender is only entitled to collect interest up to the ILA-prescribed limit.
• Limits on Damages for Delay (Late Fees): The ILA also sets a ceiling on liquidated damages or penalties for late payment (遅延損害金 - chien songaikin). This is typically capped at 1.46 times the relevant maximum permissible interest rate for the principal amount. For instance, for a loan subject to a 15% p.a. interest limit, the maximum damages for delay would be 21.9% p.a. (15% x 1.46).

Historical Context: The "Gray Zone Interest" Issue

For many years, Japan had a complex situation known as "gray zone interest" (グレーゾーン金利 - gurē zōn kinri). This arose from a disparity between the ILA's caps and higher caps permitted under specific conditions by the (now significantly reformed) Moneylending Business Act (貸金業法 - Kashikingyō Hō). Under certain strict (and often disputed) circumstances, a provision known as "deemed repayment" (みなし弁済 - minashi bensai) in the old Moneylending Business Act allowed lenders to retain interest payments made by borrowers even if those payments exceeded ILA limits, provided specific voluntary payment and disclosure requirements were met.

However, a series of Supreme Court rulings in the mid-2000s increasingly invalidated the minashi bensai doctrine, and comprehensive legal reforms, culminating around 2010, effectively eliminated this gray zone by aligning the enforceable interest rate caps across different laws closer to the ILA standards and abolishing the minashi bensai provisions. This was a major victory for consumer protection and led to widespread claims for overpayment refunds. The Servicer Law's provisions must be understood against this backdrop, particularly for older claims that might have originated during the "gray zone" era.

The Servicer Law's Clear Prohibition: Article 18, Paragraph 5

Article 18, Paragraph 5 of the Servicer Law directly addresses how servicers must handle claims with interest or damage terms that contravene the ILA. It unequivocally states:

"A Servicer Company shall not, with respect to a Specified Monetary Claim for which there is an agreement to pay interest... or liquidated damages... that exceeds the limit amount prescribed in Article 1... or Article 4... of the Interest Limitation Act..., demand from the debtor... payment of said interest or liquidated damages that exceeds said limit amount."
(「債権回収会社は、利息制限法...第一条...に規定する制限額を超える利息...又は同法第四条...に規定する制限額を超える賠償額の予定がなされている特定金銭債権について、債務者に対し、当該制限額を超える利息又は賠償額の支払を要求してはならない。」)

The key takeaways from this provision are:

1. Applies to Specified Monetary Claims: The rule is specific to the types of claims that licensed servicers are authorized to handle.
2. No Demand for Excess Amounts: If the original loan agreement stipulated interest rates or default damages higher than what the ILA permits, the servicer is strictly prohibited from demanding payment of the portion that exceeds those legal limits.
3. Implicit Duty to Recalculate: To comply with this prohibition, the servicer has an implicit and practical obligation to recalculate the outstanding balance of the claim according to the ILA's maximum permissible rates. They cannot simply ignore the ILA and attempt to collect based on the original, non-compliant contract terms.

Evolution of the Rule: The Significance of the 2001 Amendment

It's important to note that the current wording of Article 18, Paragraph 5, reflects a significant amendment made to the Servicer Law in 2001. The original provision, as enacted in 1999, was even stricter. The pre-2001 version stated that if a Specified Monetary Claim had an agreement for interest or damages exceeding ILA limits, the servicer "shall not demand performance thereof" (その履行を要求してはならない - sono rikō o yōkyū shite wa naranai). This was widely interpreted to mean that servicers could not demand any payment on such a claim, not even the principal or the legally compliant portion of interest, if the original contract was tainted by usurious terms.

The 2001 amendment relaxed this to the current standard. Now, servicers can demand payment of the principal and any legally permissible interest and damages, provided they first recalculate the claim to conform strictly to ILA limits.

The rationale for this amendment was twofold:

• The original, very strict prohibition was seen by some as overly harsh and potentially an impediment to the efficient resolution of NPLs, as general civil law principles allow for a contract to be partially void (i.e., the usurious portion) while still allowing enforcement of the legally valid part.
• By 2001, the servicer industry had been operating for a couple of years, and there was growing confidence in its ability to conduct business compliantly and professionally. The initial concerns about potential abuses by a newly created industry had somewhat lessened, allowing for a more pragmatic approach aligned with standard civil law.

Practical Application: Recalculation, Communication, and Record-Keeping

For a servicer handling a claim potentially affected by the ILA:

1. Identification and Verification: The first step is to identify any claims in their portfolio where the original contractual interest rates or default damage terms appear to exceed ILA limits. This requires careful review of loan documentation.
2. Recalculation (引き直し計算 - hikinaoshi keisan): The servicer must perform a detailed recalculation of the debt. This involves:
   • Applying the correct ILA-stipulated maximum interest rate(s) retrospectively from the loan's inception or the relevant period.
   • Re-appropriating all past payments made by the debtor, first to any legally accrued interest and then to principal, according to ILA principles. This can often result in a significant reduction of the claimed outstanding balance, especially if the original interest rate was substantially above ILA limits and payments had been made over a long period.
3. Demand Based on Recalculated Amount: Any subsequent demands for payment made by the servicer to the debtor must be based only on this recalculated, legally compliant outstanding balance.
4. Transparency with Debtors: The Ministry of Justice's Administrative Guidelines (事務ガイドライン - jimu gaidorain), as well as Rule 10, Item 5 of the Servicer Law Implementing Regulations, emphasize transparency. If a servicer makes a demand based on a recalculated ILA-compliant amount, and the debtor (or their representative) requests details about how that amount was arrived at, the servicer must provide:
   • The amount of the claim being demanded and its breakdown (principal, legally compliant interest, legally compliant damages).
   • The basis for calculating that amount (e.g., details from the original loan agreement regarding principal and interest, the payment history, the ILA rates applied, and the methodology of the recalculation).
5. Mandatory Record-Keeping: The Administrative Guidelines also require servicers to create and maintain specific internal records (referred to as "No. 7 Ledger" - 7号帳簿, for recording the details of the claim and the recalculated demand, and "No. 8 Ledger" - 8号帳簿, for collating supporting documents like the original contract and payment history) whenever they make demands on such recalculated claims. This ensures that there is an auditable trail of how the legally compliant amount was determined.

Which Claims Are Most Affected?

This provision is most directly relevant to:

• Loan Claims: Particularly those originating from some consumer finance companies or other moneylenders, especially if the loans were extended before the full tightening of the Moneylending Business Act around 2010 which largely addressed the "gray zone" issue.
• Older Debt Portfolios: Claims originating when enforcement of ILA limits was less stringent or where minashi bensai arguments were more prevalent.

While other types of Specified Monetary Claims (e.g., lease payments) might not have explicit "interest" in the same way, any associated late fees or default penalties could still be scrutinized against the ILA's limits on damages for delay.

Consequences of Demanding Excessive Amounts

A servicer that violates Article 18, Paragraph 5 by demanding amounts exceeding ILA limits faces several potential repercussions:

• Violation of the Servicer Law: This is a direct breach of a key conduct regulation.
• Administrative Sanctions: The Ministry of Justice can issue business improvement orders, suspend operations, or, in egregious cases, consider license revocation.
• Unenforceability of Excess Demand: Any portion of the demand that exceeds ILA limits would be legally unenforceable in a Japanese court.
• Reputational Damage: Being found to engage in such practices can severely damage the servicer's reputation.
• Civil Claims for Overpayment: If a debtor has made payments based on demands that included illegally excessive interest (and those payments, when re-appropriated, exceed the legally due amount), they may have a claim against the servicer (or the original creditor, depending on the circumstances) for a refund of the overpaid amounts (不当利得返還請求 - futōritoku henkan seikyū).

Implications for U.S. Businesses

These rules have significant implications for U.S. entities involved with Japanese debt:

• Investors in NPLs or Debt Portfolios: When U.S. investors are considering acquiring Japanese loan portfolios, particularly older consumer or SME loans, meticulous due diligence is required to identify any claims where the original contractual terms might violate the ILA. The true recoverable value of such claims must be assessed based on the ILA-compliant recalculated amount, not the face value dictated by the original (potentially usurious) contract. This directly impacts portfolio valuation, pricing negotiations, and expected returns.
• Creditors Engaging Japanese Servicers: U.S. creditors who entrust claims to Japanese servicers need to understand that their servicer partners are legally obligated to adhere to the ILA. They cannot instruct a servicer to pursue the full originally contracted amount if it is usurious under Japanese law. Open communication with the servicer about how ILA compliance is handled is advisable.
• Establishing Servicer Operations in Japan: Any U.S. entity planning to establish a licensed servicer subsidiary in Japan must implement robust internal systems, processes, and staff training to ensure strict compliance with Article 18, Paragraph 5. This includes accurate ILA recalculation capabilities and procedures for transparent communication with debtors regarding such claims.

Conclusion

The Servicer Law's prohibition against demanding interest or damages for delay in excess of the limits set by Japan's Interest Limitation Act is a cornerstone of debtor protection and a critical compliance obligation for all licensed servicers. It reflects Japan's strong public policy against usury and ensures that even when dealing with claims that may have originated with non-compliant terms, the collection process itself adheres to established legal standards for fairness in lending. For businesses operating in or investing in Japanese debt, awareness of this rule is essential for accurate claim valuation, risk management, and ensuring compliant operations.