What Happens When Too Much Interest Is Charged on a Loan?

In today’s hard economic environment, it is often hard for borrowers to obtain conventional loans from a lender. As a result, it is often necessary for borrowers to turn to less conventional lenders, sometimes referred to as hard-money lenders. The non-traditional lenders often times charge interest rates much higher than that of a traditional lender and often times at rates that implicate the Anti-Usury Statute, Massachusetts General Laws, Chapter 271, Section 49. One would think that a violation of the Anti-Usury Statute would also be a violation of Chapter 93A, The Consumer Protection Act. However, as found by the Court in Germinara v. The People’s Comprehensive Mortgage, a violation of the Anti-Usury Statute is not necessarily a violation of Chapter 93A, Section 11.

In Germinara, the lender admitted that it had violated the Anti-Usury Statute by charging an interest rate in excess of the maximum rate permissible by law without having registered with the Attorney General’s Office. A lender who registers with the Attorney General’s Office may charge rates in excess of the statutory maximum set by the Anti-Usury Statute. The Court determined that the appropriate remedy in this instance was not voiding of the loan but was instead reformation. The Court ordered the interest rate to be reset at 18%. It should be noted that a violation of the Anti-Usury Statute does not mandate a voiding of a loan. Rather, the statute gives a judge discretion, based upon all the facts and circumstances surrounding the loan, to void it, to rescind it, to refund, to credit any excessive interest paid, to reform the contract, or to provide any other relief consistent with equitable principle. The Court will look to the integrity of the loan to determine what remedy is appropriate.

In the Germinara case, the lender previously had been registered with the Attorney General’s Office so as to permit it to make loans that would otherwise be usurious. Just prior to making the loan, the attorney representing the lender died. Between the date of death of the attorney and the date of death of the loan, the registration with the Attorney General’s Office, which is valid for two years, had expired without renewal. Accordingly, at the time the loan was made, the registration had expired, and the loan was therefore usurious. The Court ultimately found that the lender, when negotiating and setting the terms of the loan, did not engage in misconduct. The Court also found that the borrower was a sophisticated business person with highly competent counsel and that the borrower understood and appreciated the obligations he was undertaking when executing the loan documents.

The Court noted that the loan was a high-risk loan from a lender’s perspective and the Promissory Note expressly provided for reformation as the remedy if the interest rate was found to be usurious. Finally, the judge observed that there were no recurring violations of the Anti-Usury Statute; rather, that the violation resulted from a one-time, relatively small payment of closing costs and points. What this tells us is that for sophisticated business people borrowing money at high interest rates because conventional lending is unavailable in today’s market, this is an avenue of obtaining loans and the usurious loans may be enforced. So, should you need a usurious loan utilizing non-traditional lenders as a mechanism for funding a business or business ventures, it’s always risky due to the very nature of the loans. However, these loans may be appropriate in unique circumstances. If you intend to use this method to fund your business operation, it is suggested that you proceed with caution and research the lender thoroughly to determine if the lender is registered with the Attorney General’s Office. In addition, find out from the Attorney General’s Office the lender’s history of compliance making usurious loans. Ultimately, the decision to utilize a high-interest loan becomes a business decision based upon the necessity for money and the funding sources available. We always recommend that a borrower, whether seeking a traditional loan or a non-traditional loan, proceed with caution as these loan obligations are likely to be found enforceable by the Courts (Robert Germinara and others v. People’s Comprehensive Mortgage, 98 Mass.App.Ct. 1117). Jonathon D. Friedmann, of our Litigation Department, was trial counsel for the prevailing party, People’s Comprehensive Mortgage, and successfully defended the judgment in favor of People’s Comprehensive Mortgage against Germinara on appeal.