That Pesky Little Thing Called Usury

With the credit markets still tight , I have seen a spike in private loan transactions.  These deals, sometimes known as “hard money” loans, typically have a higher rate of interest than a conventional bank loan.  If a borrower’s credit score is below average, or if the borrower’s income is not sufficient to obtain a conventional loan, private money may be the only option the borrower has to get their deal funded.

What is the first thing I do when a client calls me to assist with one of these transactions (whether it be on the borrower-side or the lender-side)?  I calculate the annual rate of interest on the proposed loan.  Why do I do this?  Because I need to find out if the proposed interest rate is within Minnesota’s usury limits.

Usury refers to the charging of interest above the rate allowed by law. In common usage today, the word means the charging of unreasonable or relatively high rates of interest.  Minnesota’s usury statutes  are fairly straightforward.  For loans under $100,000 , interest can be no higher than 8%; for business or agricultural loans under $100,000 , the maximum interest rate is 4 ½ % above the Federal Reserve’s discount rate, and for loans over $100,000, there is no limitation on the interest rate.  If a usurious interest rate is charged in violation of Minnesota law, the borrower can bring an action against the lender to recover the interest paid  and any mortgage which secures the note is void

Why do the usury laws exist?   Because many of the high-interest rate loans are being made to persons with a high risk of default.  If we’ve learned anything from the current housing market, the last thing we as a society want to encourage is to give problem borrowers access to risky financing.  So, we cap the interest rates below the $100,000 threshold.

Usury law can be a pesky thing in today’s real estate market, but it serves an important purpose and that’s why I use it as a starting point when evaluating a proposed private loan.