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Financial Services Law Insights and Observations

2nd Circuit: New York usury law does not apply to interest rate applied after default

Courts State Issues Appellate Second Circuit Interest Usury Debt Collection


On March 30, the U.S. Court of Appeals for the Second Circuit affirmed multiple orders issued by a district court in favor of an assignee mortgage holder (plaintiff), concluding that a borrower (defendant) was liable for interest at a default rate of 24 percent per year. After the defendant fell behind on his mortgage payments, the debt ultimately was assigned to the plaintiff, who initiated a foreclosure action. The plaintiff alleged a default date of February 1, 2008, and contended that the defendant was liable for interest at the 24 percent per year default rate. The district court granted the plaintiff’s motion for summary judgment, holding that the motion was supported by record evidence and that defendant’s affirmative defenses were meritless. The defendant’s motion for reconsideration was denied. A court-appointed Referee issued a report calculating the amount due on the note and mortgage, which the defendant appealed on several grounds, arguing, among other things, that (i) the plaintiff is a “debt collection agency” under New York City Administrative Code, and is precluded from taking action without being licensed; (ii) the 24 percent default interest rate applied by the Referee violates New York’s civil usury stature (which caps interest rates at 16 percent); and (iii) “the Referee erred by applying the default interest rate from the date of default rather than from the date of acceleration.”

On appeal, the 2nd Circuit concluded that, regardless of whether the plaintiff allegedly failed to obtain a debt collection agency license, the plaintiff was not necessarily barred from foreclosing on the mortgage and collecting the debt at issue. The appellate court also determined that New York’s civil usury statute “‘do[es] not apply to defaulted obligations . . . where the terms of the mortgage and note impose a rate of interest in excess of the statutory maximum only after default or maturity.” The appellate court further held that the mortgage note and agreement clearly stated that a lender is “entitled to interest at the [d]efault [r]ate . . . from the time of said default. . . .”

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