A Usurious Loan – Really?

I am reminded of a CLE program for the New York State Bar Association in which I participated a few years ago when a portion of an all-day session assigned to me included a discussion of usury.  This happens to be a difficult and arcane topic although there is a way to present it in understandable fashion. Nonetheless, the post-presentation comments of the attendees indicated a wonderment as to why usury was being offered:  “I don’t encounter that in my practice” observed a few. While it is true that usurious loans are not an everyday occurrence, case law confirms that it does happen and the subject is litigated – and a current case underscores the point [Roopchand v. Mohammed, 154 A.D.3d 986, 62 N.Y.S.3d 514 (2d Dept. 2017)].

To be sure, the recent case is not a mortgage foreclosure matter (it was a suit on a note but the point is the same) and the example is particularly egregious.  Concededly too, this will rarely be a concern for institutional lenders but it can be an issue for private lenders and their counsel.

Here, a promissory note was executed to repay principal of $200,000.00 with interest at the rate of 100%, or 50% per annum for 2 years.  The obligor was an individual but the note provided that the borrower’s corporation would honor full payment of the loan. When default ensued and the plaintiff moved for summary judgment in lieu of complaint, the court addressed a host of very fundamental usury maxims which in turn offers a salutary overview of meaningful basics.

First was the recitation that the maximum interest rate before civil usury is invoked is 16% – any rate in excess of that is usurious.  That noted, it must be observed that the exceptions to this rule are multitudinous, significant and nuanced and attention should be paid to those.  The elemental aspect, though, is that a loan from an individual lender to an individual borrower in an amount under $250,000.00 is subject to the 16% rule.

Next the court noted that criminal usury, the only usury defense available to a corporation, would apply when a person knowingly charges interest on a loan or forbearance at a rate exceeding 25%.

There is, however, a presumption against a finding of usury so that one seeking to impose a usury defense bears a heavy burden of proving it by clear and convincing evidence. The borrower bears the burden as well of proving each element of usury by clear and convincing evidence – usury will not be presumed.  However, where a loan agreement is usurious on its face – as was patently so here – usurious intent will be implied and usury will be found as a matter of law.

At a stated interest rate of 50% per annum, usury on the face of the note could not have been more apparent.

And then comes the astonishing – or perhaps not so startling – consequence of such a loan.  The rule is that a usurious contract is void and relieves the borrower of the obligation to repay both principal and interest. (But note there are exceptions for certain institutional lenders.) Critically, where usury has occurred “the borrower can simply keep the borrowed funds and walk away from the agreement”.

It is rather stupefying that both a lender and its counsel (assuming it had legal advice) could charge such an absurd rate of interest.  Most cases of usury are far more subtle involving additional fees which when added to the note interest rate cross the line from a legal to an unenforceable percentage.  In any event, these things are possible, and having at least an elemental sense of the basics is worthy.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2018), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.