Is Your Loan in Violation of Florida Usury Law? by Joel Glick, CPA/CFF, CFE
Posted on April 25, 2022
Mention of the term “usury” often conjures up images of predatory payday lenders and loan sharks. Yet, the practice of charging an excessive rate of interest on loans or similar lending agreements can occur in various traditional financial transactions as well. To protect yourself, you must recognize the nuances in usury law that differ from one state to the next, including the way in which each jurisdiction analyzes the characteristics of the transaction including interest and fees over the term of a loan. While each state and the District of Columbia have their own laws dictating what constitutes a usurious rate, this article focuses solely on the statutes in Florida.
Florida Usury Laws
Florida defines a usurious transaction as a loan, line of credit, advance of money or other obligation, as defined under the statute, in which a lender* charges an interest rate (whether actually paid by the borrower or not) in excess of 18 percent on amounts up to $500,000, or more than 25 percent on amounts in excess of $500,000. A rate above 25 percent and less than 45 percent is a misdemeanor, while a rate above 45 percent ais a third-degree felony.
The challenge with avoiding a potentially usurious transaction lies in the structure of the agreement as well as the intricacies found within the agreement, including the characterization of various fees and the determination of whether the intent of an agreement is to issue a debt obligation or acquire an equity interest. Both lenders and borrowers should consult legal counsel before agreeing to any financial obligation.
How are Transaction Fees Characterized?
Late fees, exit fees, commitment fees, underwriting fees, origination fees and discount points are examples of costs lenders often charge as a part of a typical loan. These fees, however, have the potential to put lenders at risk of violating state usury laws. For example, the courts may treat fees considered unreasonable or uncustomary as a part of the interest calculations to be spread over the full term of a loan, thereby increasing the effective interest rate above the legal limit. Knowing what fees may be deemed as interest is important to ensure compliance with usury laws.
In some instances, an agreement may stipulate that a lender receives not just a transaction fee, but also an amount tied to the value of the venture to which it is lending money. Examples include stock options, interests in profits or residual values. For obligations exceeding the $500,000 threshold referenced above, these amounts are excluded from the calculation of interest.
Is the Agreement a Debt Obligation or Equity Interest?
The courts look at various factors to assess the nature of a lending agreement, including the language contained in the agreement, the transference of risk between both parties and the way in which they recognize the transaction on their books. Should it be determined that an agreement is a purchase of equity interest, rather than a loan with a debt obligation, state usury laws will not apply and there will be no limits on the amount of a “return” the purchaser (lender) may charge the seller (borrower).
How is Interest Computed?
While it is not uncommon for lending contracts to be based on a 360-day year, Florida’s usury law assumes “per annum” as equal to 365 days. Too often those extra five days surprise lenders and create an interest rate which exceeds the amount allowed by law.
Consider a lender charging the maximum interest of 18 percent on a one-year, $500,000 loan. Based on a 360-day year, the annual interest charge would be $90,000, resulting in a daily rate of $250 ($90,000 / 360 days). However, because Florida relies on a 365-day year when assessing usury, the actual interest charged is $91,250 (365 days x $250/day). This calculates to an interest rate of 18.25 percent ($91,250 / $500,000), which exceeds the 18 percent maximum allowable by law.
Florida’s usury statute does not prohibit the use of compound interest; however, the lawful rates established by the statute are based on simple interest. Therefore, lenders must be careful when compounding interest to ensure the total amount charged does not exceed the lawful interest rate limits. For example, a lender that charges 17 percent interest on a one-year $500,000 loan, compounded monthly, will receive $91,946 from the borrower by the end of the year. The ensuing simple-interest calculation results in a rate of 18.39 percent ($91,946 / $500,000), which exceeds the amount allowed by law.
Lenders and borrowers must keep a watchful eye on all the intricate details of a lending agreement and the risk of usury. Failing to recognize and abide by state usury law can result in forfeiture of all future interest as well as the return of twice the amount of interest the borrower already paid. In instances of criminal usury, the loan may become void, and thus unenforceable in the State of Florida. To protect themselves from unintentional usury, lenders often will include savings clauses in their loan documents. However, Florida courts have ruled that such clauses are not valid defenses, in and of themselves. Rather, they are but one element to consider when making usury claims.
About the Author: Joel Glick, CPA/CFF, CFE, CGMA, is a director in the Forensic and Advisory Services practice with Berkowitz Pollack Brant, where he serves as a litigation consultant and expert in forensic accounting matters relating to bankruptcy and receivership, economic damages and forensic investigations. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.
* Certain consumer finance companies are exempt from usury laws.