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.