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April 19, 2022 Practice Points

What Litigators Should Know About Usury Laws

Be aware of state law nuances to protect client interests.

By Mitchell Edwards and Matthew McDonnell

When entering into any lending agreement, whether it be a private loan, a credit agreement, or a mortgage, the interest rate for the lending instrument is subject to the given state’s usury laws. Usury laws are state-specific laws that set forth limits for interest rates in specific types of lending instruments to prevent lenders from imposing unreasonable or predatory interest rates. Violations of usury laws, depending on the state, can result in criminal penalties and can also render the underlying loan void in the civil context. Unlike other broadly applicable laws that have been standardized across states, such as the Uniform Commercial Code, each state has its own standards for what is considered a usurious rate, and in some instances, its own set of specific procedures to avoid the penalties for imposing a usurious rate.

A careful review of the relevant state’s usury laws is required at the outset when drafting a lending instrument. Some states do not have any limitations on interest rates as long as they were set by written agreement, except for very specific statutory limitations for certain transactions. See e.g. S.D. Codified Laws § 54-3-1.1 (In South Dakota, there is no maximum interest rate or usury rate restrictions if the parties agreed to the rate by written agreement); N.M. Stat. Ann. § 56-8-3 (1978) (In New Mexico there is a maximum interest rate of 15 percent, only when a rate has not specifically been agreed to in the written agreement). A number of states have different limits on interest rates depending whether the borrower is an individual or whether it is a business or corporation. See, e.g. Wash. Rev. Code 19.52.080 (In Washington interest rate limitations only apply to consumer transactions); Mo. Rev. Stat. § 408.035 (no interest rate limitations on loans to corporations, partnerships or LLCs in Missouri). Other states only impose usury restrictions on smaller sums of money, with the purpose of limiting predatory behaviors such as specific pay-day lending practices. See, e.g. Miss. Code Ann. § 75-17-1(5) (2021) (loans of over $2,000 are exempt from usury requirements in Mississippi); Ga. Code Ann. § 7-4-2 (2021) (In Georgia, for loans of $3,000 or less, the interest rate cannot exceed 16 percent annually).

Another important factor when setting forth an interest rate in a lending instrument is how the interest is calculated. Some states offer fixed rates, while others set maximum interest rates based on moving indexes or other non-fixed indicators. For example, in Kentucky, for loans of $15,000 or less, the maximum interest rates cannot exceed the lesser of either 19 percent or 4 percent in excess of the discount rate on 90-day commercial paper in effect at the Federal Reserve Bank in the Federal Reserve District where the transaction is consummated. Ky. Rev. Stat. § 360.010(1). Additionally, where the promissory note or other lending instrument provides for other fees or expenses to be paid to the lender, in some states those fees are included in the calculation of the underlying interest. See Lugli v. Johnston, 78 A.D.3d 1133, 1135 (N.Y. App. Div. 2010) (including loan origination fees in the calculation of interest owed under a promissory note for the purposes of a usury determination). This may also include attorney fees that are incurred in attempts to secure repayment under a note. See Taveras v. Sprunk, 298 B.R. 195, 203 (Bankr. D. Mass. 2003) (attorney fees to be included in the calculation of an interest rate).

Arguably the most unique set of procedures set forth by state usury laws is in Massachusetts, which has a broad usury rate of 20 percent. However, Massachusetts offers a unique mechanism where a lender can enter into a loan agreement with an agreed-to rate of more than 20 percent. Under the usury law, a lender can file a notice with the Massachusetts Attorney General of the intent to enter into such an agreement. Mass. Gen. L. ch. 271, § 49(a), (d). As long as a valid notice was filed before the lender issued the funds to the borrower, and the required loan information was maintained, then the loan of over 20 percent interest would be deemed legal.

The complexity and nuance contained in state usury laws requires attorneys assisting clients with matters involving lending to prepare and to pay careful attention to applicable state usury laws. The parties in the transaction, the amount of the transaction and the purpose of the transaction are all material pieces of information that need to be taken into account. Developing a firm handle on the relevant state’s usury laws is paramount in ensuring that clients’ interests are protected from the inception of the loan agreement all the way through collection.

Mitchell R. Edwards is a partner with  Hinckley Allen & Snyder, LLP, in Providence, Rhode Island. Matthew S. McDonnell is an associate with the firm in Boston, Massachusetts.

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