Mortgage and Note Default: Avoiding Usury Allegations
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Under Florida law, there are maximum interest rates that lenders may charge. Any loan with interest in excess of the specified limit is subject to either civil or criminal usury, which means that the lender may have to pay significant penalties or forfeit the right to collect on the loan. Lenders are generally aware of the maximum interest rates allowable by law, but some loans can be structured with advances, fees and escrows in a way that—in totality—may be deemed legally usurious interest. In those cases, lenders should exercise caution in drafting loan agreements and review them periodically to ensure compliance with Florida law.
Florida law defines two causes of action that may be brought against lenders who engage in usury lending practices: civil usury and criminal usury. Civil usury, explained in Florida Statutes, section 687.071(1) involves loans of $500,000 or less with an interest rate greater than 18 percent and less than 25 percent. Criminal usury, addressed in Florida Statutes, section 687.071(2), involves any loan amount with an interest rate greater than 25 percent. Whether a loan is usurious is determined at the inception of the loan. Velletri v. Dixon, 44 So. 3d 187, 189 (Fla. 2d DCA 2010).
Remedies for Usury Loans
Penalties for civil usury include forfeiture of double the interest that the lender actually charged and collected. See Fla. Stat. § 687.04. In the context of criminal usury, the civil remedy is forfeiture of the right to collect the debt. See Fla. Stat. § 687.071(1).
Components Of Loan Considered In Usury Calculations
There are several components of a loan which should be considered in usury calculations.
Many lenders include penalties for late payments in their loan documents. This helps motivate borrowers to make timely payments and also reduces overall risk for lenders. Lenders should only impose a late charge once on a missed payment.
If a lender exercises an option to accelerate the loan, then the lender is only allowed to collect late charges that accrued up until the date of acceleration. Fowler v. Amylene, Inc. v. First Federal Savings & Loan Association of Defuniak Springs, 643 So. 2d 30 (Fla. 1st DCA 1994). Fowler follows the reasoning of other courts throughout the country in prohibiting lenders from collecting late charges after a note is accelerated. See, e.g., SKW Real Estate Limited Partnership v. Gallicchio, 49 Conn. App. 563 (1998).
Florida courts have not addressed whether late charges are included in the usury calculation. However, other jurisdictions usually find that late charges are additional interest for the purposes of the calculation. See, e.g., Thrift Funds of Baton Rouge, Inc. v. Jones, 274 So. 2d 150 (La. 1973), cert. den. 414 U.S. 820.
Many lenders also include a provision entitling them to impose a default rate of interest in addition to the regular interest charged under the terms of the note. Many of these provisions state that the rate of default interest is the maximum rate allowed by law. In Florida, the maximum allowable rate is 18 percent simple interest for loans of $500,000 or less. Fla. Stat. § 687.03. For loans of more than $500,000, the maximum allowable rate is 25 percent simple interest. Fla. Stat. § 687.071.
When drafting provisions allowing the imposition of default interest, lenders should consider whether the interest will be imposed from the date of default or the date of acceleration. From a lender’s perspective, specifying that default interest accrues from the date of default allows for a larger recovery.
Default interest should not be imposed during any grace periods that the lender grants. Florida’s Fifth District Court of Appeal explained that:
Where days of grace are allowed on an instrument, the allowance is a matter of right and not a matter of grace. The allowance enters into, and forms a part of, the contract, and the instrument does not become due in fact or in law until the last day of grace. The maker of acceptor has the whole of the last day of grace in which to make payment, and he is not in default until the expiration of that day.
Banksville, N.V. v. McNeill, 529 So. 2d 828 (Fla. 5th DCA 1988) (quoting 10 C.J.S. Bills and Notes § 262 (1938)). If a lender extends grace, it is not allowed to later impose default interest on the period of grace unless expressly authorized in the note.
Loan Proceeds Retained By The Lender
“Loan proceeds retained by the lender are considered additional interest and do not reduce the stated amount of the loan identified in section 687.03(3).” Velletri v. Dixon, 44. So. 3d 187, 191 (Fla. 2d DCA 2010) (internal citations omitted). This is important to keep in mind when negotiating loans that contain escrow account provisions.
Not all loans that hold certain funds in escrow accounts are usurious. Id. Rather, “the normal procedure when a portion of the loan proceeds are held in escrow to be later advanced . . . is for the lender to charge interest only on the amounts already advanced, not the entire stated amount of the note.” Id. at 191 (citing Williamson v. Clark, 120 So. 2d 637, 639 (Fla. 2d DCA 1960)).
Determining Whether A Loan Is Usurious When The Lender Retained Some Proceeds
Florida Statutes, section 687.03(3) provides the methodology to determine whether a loan is usurious when some of the loan proceeds are retained by the lender at closing. The calculation is somewhat cumbersome. For examples of courts walking through the calculations, see Petersburg Bank & Trust Co. v. Hamm, 414 So. 2d 1071, 1073 (Fla. 1982) and Valletri v. Dixon, 44 So. 3d 187, 190-91 (Fla. 2d DCA 2010).
Lenders must be mindful of the statutory maximum allowable rates of interest. In addition, lenders should understand what fees, advances and expenses are calculated by the courts for usury purposes. Reviewing standardized loans often is important to avoid allegations of usurious lending.
Brandon C. Meadows, Esq.
Evan R. Reid, J.D. Candidate