Usury: Mortgage Void And Savings Clause Doesn’t Work

In response to the title of this alert, some readers will immediately conclude that usury is not an issue for them; they never encounter it.  Actually, that is true to a significant extent for most people involved with institutional lenders.  There, interest rates tend to be highly competitive and never get near a usury threshold to even approach the question.  That said, it should be emphatically observed that usury precepts are particularly arcane and difficult so no one can readily enter the realm unknowingly – one of many examples: points enter into the interest calculation and can thrust a loan over the usury line.  (Usury is a very obtuse subject and for those needing more information, it consumes a whole chapter in Bergman on New York Mortgage Foreclosures, see Chapter 6.)

All this stated, it remains true nonetheless that all other lenders need to understand some of the dangers of a usurious loan – succinctly presented in two new cases.  Russakaya Reklama, Inc. v. Milman, 47 Misc.3d 88, 9 N.Y.S.2d 759 (App. Term 2015); Fred Schutzman Company v. Park Slope Advanced Medial PLLC, 128 A.D.3d 1007, 9 N.Y.S.3d 682 (2d Dept. 2015).

While facts are always critical, for our purposes here the primary focus will be the legal principles which are highlighted by the cases.  Here are some critical concepts about a usurious loan:

• Partial payment by the borrower cannot validate, confirm or ratify the loan.
• It is void and neither the principal nor the interest can be recovered (but note that there are exceptions for certain banking institutions).
• A lender’s agreement to waive all interest does not thereby allow collection of principal.
• A “savings clause” in a mortgage – an agreement to reduce interest to a non-usurious rate if the original rate runs afoul of the law – does not rescue the loan.

This last point merits further brief comment.  Experience suggests that prevailing wisdom is that such a clause will save the day; indeed, these provisions are common in notes or mortgages – if not standard.  But it has long been a matter of case law (confirmed here again) that the clauses do not save.  And an underlying reason may help to remember the concept.  If the savings clause could rescue a usurious loan, then the unscrupulous would often charge usurious rates.  On the presumably rare occasion where a borrower might notice and complain, the provision would preserve the loan and the borrower would still pay the highest rate allowed by law.  Meanwhile, all the less astute borrowers would be paying usurious sums.  It should be apparent then why courts do not enforce the savings provisions.

When statute and case law say a usurious loan is void they mean it.  The nuances of usury are tough to master so any lender is wise to be especially careful in this territory.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), 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.