New York imposes two separate rates for determining usury, a 16% rate for civil usury, and a 25% rate for criminal usury. On its face, it seems straightforward. However, when you investigate usury as a defense to charges of interest you will uncover that it does not have the universal applicability so generally assumed and that there are many exceptions to the civil usury limit.

One would think a simple question like “How much interest may I charge?” would have a simple answer. It does not. This article provides guidance to some of the larger questions one may face when deciding whether to raise usury as a defense.

Statutory Authority

Usury, as defined in New York, is principally located in two articles of law, Article 5, Title 5 of the General Obligations Law (GOL) and Penal Law §§190.40, 190.42, and 190.45. We note that the numbering of the sections in both of these sources of authority anticipates that the legislature may wish at some time to insert additional articles on the subject of usury. Thus, the Legislature has manifested that it intends that this area of the law be complicated.

The General Obligations Law provisions deal with the civil side of usury and deal with specific percentage rates and the circumstances under which they could void a transaction or impair enforcement of contracts exceeding these percentages. Banking Law §14-a provides that the maximum rate of interest provided for in section §5-501 of the GOL shall be 16% per annum.

The Penal Law provisions set criminal usury at 25%. However, these provisions only criminalize the imposition of the higher rate, “when not being authorized or permitted by law to do so.” Thus, if there is a specific statute that does authorize these high rates, that statute immunizes the lender from criminal prosecution.

The Core of the Doctrine

General Obligations Law §5-501 essentially defines the transactions to which the civil usury maximum rate of 16% apply to as “the loan or forbearance of any money, goods, or things in action.” However, there are many exceptions.

Black’s Law Dictionary defines “forbearance” as “The act of refraining from enforcing a right, obligation, or debt.” Thus, if one agrees to forbear to enforce a debt, provided some interest be paid, that interest rate would be regulated in the same manner as if it were a promissory note memorializing the debt in the first instance.

Key to the understanding of the entire field is that there are a number of ways one can owe someone money, but not all of these are “loans” or even “forbearances.” For example, leases are not subject to the usury laws, Orix Credit Alliance v Northeastern Tech Excavating Corp., 222 A.D.2d 796, 634 N.Y.S.2d 841 (3^rd Dept. 1995) but are subject to other kinds of laws regulating the charges and fees they can impose. (See, for example, Real Property Law §238-a restricting, inter alia, late fees in residential leases.)

Of particular interest to the readers of this article, attorneys’ retainer agreements do not count as loans. Thus, they are not subject to the usury laws. Bryan L. Salamone, P.C. v. Russo, 129 A.D.3d 879 , 15 N.Y.S.3d 344 (2nd Dept. 2015).

However, recalling our previously stated definition of “forbearance,” where the original debt was not in the form of a loan and thus not subject to the usury laws, the subsequent forbearance agreement with regard to collecting on that debt will be subject to the usury laws. But note that loan agreements arise before the debt is incurred and forbearances arise after the debt had already existed.

Loans at or Above $250,000 and $2.5 Million

Under GOL Law §5-501(6)(b), the civil and criminal usury limits do not apply to loans at or above $2.5 Million. 72nd Ninth LLC v. 753 Ninth Ave Realty LLC, 168 A.D.3d 597 (App. Div. 1st Dept. 2019).

Loans in the amount of $250,000.00 or more are generally exempt from the 16% civil usury cap, but not the 25% criminal usury cap. Loans “secured primarily by an interest in real property improved by a one or two family residence”, however, do not qualify for this exemption and are thus subject to both the 16% civil usury and the 25% criminal usury caps. GOL Law §5-501(6)(a).

Corporations and LLCs

New York statutory law provides that loans to corporations and limited liability companies are generally exempt from the 16% civil usury cap, though they are subject to the 25% criminal usury cap. GOL § 5-521; N.Y. Limited Liability Company Law (“LLCL”) §1104.

This exemption for civil usury, however, does not apply to where the corporation or LLC owns a one or two family dwelling as its principal asset and was created or acquired within six months prior to the issuance of a mortgage on the one or two family dwelling.

Specifically, the statues provide that the exemption:

shall not apply to a corporation [or LLC], the principal asset of which shall be the ownership of a one or two family dwelling, where it appears either that the said corporation was organized and created, or that the controlling interest therein was acquired, within a period of six months prior to the execution, by said corporation of a bond or note evidencing indebtedness, and a mortgage creating a lien for said indebtedness on the said one or two family dwelling. GOL §5-521(2); LLCL §1104(2).

In other words, where a mortgage loan is made to a corporation or LLC for the acquisition of a one to two family residence (or the acquisition of the corporation or LLC owning the one to two family residence), or for refinance within six months after acquisition, the loan is subject to the 16% civil usury limit. Loans to corporations that own three and four family residences and those that have held one to two family residences for six months or more (with no change of ownership during that time) are exempt from the 16% civil usury cap, but subject to the 25% criminal usury cap.

Purchase Money Mortgages

Because the interest is regarded as part of the purchase price, purchase money mortgages are exempt from the civil usury rules, being subject only to the criminal provisions. C & M Air Sys. v. Custom Land Dev. Group II, 262 A.D.2d 440, 692 N.Y.S.2d 146 (2nd Dept. 1999). The court wrote, “It is true that a purchase money mortgage is not considered a “loan or forbearance” under the General Obligations Law, and the interest rate applicable thereto ordinarily is limited only by the criminal usury laws.” It also, like many of the other cases we discuss in the article, found a way to find the loan enforceable because the loan, by its terms, is limited to the maximum legal interest. Clearly, if a clause says that it is limited to whatever it legal, it cannot be refused enforcement for illegality.

Default and Maturity

There are loans that have different interest rates during the term of the loan itself, compared to what happens if the borrower has defaulted on the loan or missed a payment after the maturity date. For purposes of discussion, we will call the during the loan rate, the “Normal Rate” and we will call the post-default or post-maturity rate, the “Penalty Rate.” So long as the Normal Rate is legal, the usury defense does not apply to the Penalty Rate. See Kraus v. Mendelsohn, 97 A.D3d 641 (“[T]he defense of usury does not apply where…the terms of the mortgage and note impose a rate of interest in excess of the statutory maximum only after default or maturity”). This is because once the default has taken place, in the eyes of the law, this is no longer a “loan,” but rather a “debt.”

Further, the cases have pointed out, that at the time of entering into the loan, if the debtor had made all their payments in full and on time, they would remain at the normal rate, but it was the act of defaulting on the debt that placed them into the penalty rate.

In order to take this leap of logic, the law makes an assumption that observers of the law have noticed permeating the entirety of Anglo-American Law: people possess infinite amounts of money and only miss payments by choice. We see this, for example, when one is seeking an injunction. The court will turn down the request injunction if a money judgment against the enjoined person will make the person seeking the injunction whole. Why? Because the person against whom the money judgment is assessed is conclusively presumed to be able to pay it and therefore when they do pay it, the person seeking the injunction will have suffered no loss. The law has no recognition of the term “judgment proof.” Rather, people are assumed to have infinite money.

From this logically flows the idea that one freely enters into a punitive promissory note with an horrendous Penalty Rate because any failure to pay is a matter of pure choice. While in the real world this is plainly false, it is the justification for the law.

However, the law is clear that these agreements are fully enforceable, provided only that they may not constitute a penalty. Emery v. Fishmarket Inn of Granite Springs, 173 A.D.2d 765, 570 N.Y.S.2d 821 (2nd Dept. 1991) wrote: “Moreover, so long as an interest rate is not usurious or does not constitute a penalty, the parties are similarly free to agree that the contract rate of interest shall increase upon default.”

We can observe these various principles at play in the case law.

‘Miller Planning Corp. v. Wells’

In Miller Planning Corp. v. Wells, 253 A.D.2d 859, 678 N.Y.S.2d 340 (2^nd Dept. 1998), there was apparently the split in interest rates that we described above, the Normal Rate and the Penalty Rate. Apparently, it was only this latter rate that was above the then effective usury rate. We note that one must be careful in reading the literature on usury. The Legislature routinely raises and lowers the usury thresholds.

In Miller, the court wrote, “the defense of usury does not apply where, as here, the terms of the mortgage and note impose a rate of interest in excess of the statutory maximum only after default or maturity.”

Miller had gone on to be a leading case to which many of the other cases in the literature cite.

Also in this line of authority are Flynn v. Dick, 13 A.D.2d 756, 215 N.Y.S.2d 382 (1^st Dept. 1961); Shorehaven Assoc., Inc. v. King, 587 N.Y.S.2d 190 (2^nd Dept. 1992); Bloom v. Trepmal Constr. Corp., 289 N.Y.S.2d 447 (2^nd Dept. 1968); Torto Note Member v. Babad, 192 A.D.3d 843, 144 N.Y.S.3d 193 (2nd Dept. 2021); Bono v. Stim & Warmuth, P.C., 215 A.D.3d 911, 188 N.Y.S.3d 552 (2nd Dept. 2023); and Klapper v. Integrated Agricultural Management Co., 149 A.D.2d 765, 539 N.Y.S.2d 812 (3rd Dept. 1989). Unsurprisingly, Klapper extends the Miller doctrine to apply to loans made for the purchase of personal property, as compared to real property which this article mostly discusses.

‘Kraus’

“Balloon mortgages” are particularly difficult for borrowers. While they present a perhaps lengthy term during which the payments are relatively easy because they lack most of the self-amortizing features of many conventional home mortgages, if the borrower is in difficult straits when the principal or its bulk falls due, they will find it extremely difficult to pay off the loan or to take out a new loan that would have the effect of doing so. Yet, this is precisely the scenario that is most likely to give rise to a Penalty Rate that makes their extremely disadvantageous situation even worse.

In Kraus v. Mendelsohn, 97 A.D.3d 641, 948 N.Y.S.2d 119 (2012), the Second Department dealt with just such a mortgage. Kraus quotes Miller precisely as we have. However, the important point of Kraus is that it makes the Miller doctrine explicitly applicable to balloon notes. However, these are the ones that hold the very highest level of danger for consumers with their double edged sword of unreduced indebtedness and increased interest rates. It is as if this kind of note is specifically engineered to accomplish a consumer’s default.

‘Hicki’

Hicki v. Choice Capital Corp., 264 A.D.2d 710, 694 N.Y.S.2d 750 (2^nd Dept. 1999) demonstrates how difficult it can be to apply these rules. There is no question that the borrower in Hicki defaulted in paying her mortgage. The trial court found that the post-default Penalty Rate was usurious and invalidated it. The Appellate Division, relying on Miller, reversed and held that Penalty Rates are not subject to the usury laws. And if that were all there is to it, then it would appear that Hicki was decided correctly on appeal.

However, when the borrower in Hicki defaulted, the bank extended the loan for an additional three months and it was for that three month period that the bank charged the higher penalty rate. Clearly, one way of seeing that three month extension was that it was a forbearance agreement. And if that is the case, then it would appear that it is subject to the usury defense. However, there is still another wrinkle. This loan was by a bank. And it is well settled that the usury rules for banks are, generally speaking, defined not by the General Obligations Law, but rather by the Banking Law. And while the General Obligations Law defines usury to include both loans and forbearances, there is no such language in the Banking Law. But, as if determined to keep the confusion going, the Banking Law references the same section of the General Obligations Law where the “forbearance” definition is located.

From this, the only conclusion that we can draw is that no matter how we may want to read the statutes, the rule apparently is that if a bank forbears on a note after default, it is exempt from the usury laws.

‘Eikenberry’

In Eikenberry v. Adirondack Spring Water Co., 65 N.Y.2d 125 (1985), the Court of Appeals dealt with a complex set of interplay of the various statutes we have been discussing in the context of a law firm suing on its fees. The court reiterated all the doctrines we have been setting forth, but added an important new point. While the interest is invalid under the usury laws, that does not invalidate the underlying debt. The court wrote:

But the fact that the (usurious) agreements may be unenforceable against the individual defendants does not mean that their underlying debt is extinguished. To the contrary, “[when] a contract for money, legal and innocent in itself, is once made and consummated, it cannot be made usurious and illegal by any subsequent transactions of the parties. These subsequent transactions may of themselves be illegal, and forbidden by law, but they cannot impart the taint and the consequences of usury to an antecedent agreement, fair, and just, and upright in itself. If the obligation under it is to pay a debt, the obligation, with the legal rights resulting from it, remain in all their force, and cannot be discharged by ingrafting upon it some subsequent agreement obnoxious to the charge of usury.

Conclusion

The Legislature frequently raises and lowers the rate of interest it deems to be usury. Those rates themselves vary depending on the identity of the parties and the circumstances of the interest obligation arising. Usury, however, is limited to loans and forbearances and is not a concept to be employed where the debt arose by some other means. There are also specific exemptions from the usury defense, such as for large loans and for loans incurred by corporations and limited liability companies. In all, this area of the law is deceptively simple and the resolution of any case will require a close examination of the intricacies of the particular matter.

Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C. Dov Treiman is the landlord-tenant managing partner of the firm. Danny Ramrattan is a partner in the firm’s foreclosure, title and real estate litigation groups.