As previously discussed, the method used to calculate an interest rate is a critical part of any usury action. This was again highlighted in a recent a New York state case. The plaintiff had filed an action to recover on a loan it had made to the defendant. As part of its defense, the defendant argued that the loan violated New York’s criminal usury statute. The trial court rejected the defendant’s usury argument and granted summary judgment in favor of the plaintiff.
On appeal, the reviewing court affirmed the trial court’s decision. The reviewing court took issue with the defendant’s method of calculating the effective interest rate of the loan. To reach an effective rate that exceeded the criminal maximum, the defendant had included as interest “points” paid to the loan broker. The court rejected this interpretation. Instead, the court only included the points paid to the lender as interest. After reducing the amount of interest by the broker’s share of the points, the court found that the effective rate was under the 25% criminal cap.
This case reflects the differences between the calculation method used to determine an interest rate for the purposes of a usury statute and the method used by the Truth In Lending Act to calculate the APR of a consumer transaction. The calculation of the APR requires the determination of the “finance charge” of a transaction. Many costs and fees that may be included in the finance charge, such as broker’s fees, would not be considered interest for the purpose of calculating an interest rate in a usury case.
Marie Holdings, Inc. v Biclyn Corp., 26 N.Y.S.3d 462, 2016 N.Y. App. Div. LEXIS 1595, 2016 NY Slip Op 01602 (N.Y. App. Div. 1st Dep’t 2016)