C. Penalties For Usury

• Jurisdiction: New York

C. Penalties for Usury

Any bond, note or contract that reserves or takes for the loan or forbearance of money a sum greater than that allowed by law shall be void.¹³⁹ The cited statute, however, refers specifically to a rate of interest as provided in GOL § 5-501, which in turn refers to Banking Law § 14-a(1), which prescribes the maximum rate of interest as 16 percent per annum. While that maximum interest rate has application in some circumstances, there are, as previously set forth, a host of exceptions. The effect, however, is the same, regardless of the maximum interest rate that may prevail in a particular mortgage transaction. As a basic principle, usurious contracts are void and invalid.¹⁴⁰

In addition to declaring void any usurious bond, note, conveyance, contract, security or evidence of debt,¹⁴¹ where either proof or admission of a defendant demonstrates usury, a court is mandated to enjoin prosecution of the obligation and order the documents to be surrendered and canceled.¹⁴² Moreover, any person who pays a usurious sum pursuant to a loan or forbearance may himself or herself, or through their personal representative, recover the money paid which was in excess of the maximum allowed.¹⁴³ Where a borrower seeks recovery of usurious interest, he or she need not pay or offer to pay any principal or interest on the loan, nor can a court compel such payment or a deposit thereof as a condition of the recovery.¹⁴⁴ The lender can be compelled to remit the unlawful interest obtained, although the lawful interest need not be returned.¹⁴⁵

For the benefit of certain specified banking institutions, the legislature has created an exception to the general rule contained in GOL § 5-511(1) that usurious contracts are void. A savings bank,¹⁴⁶ savings and loan association¹⁴⁷ or a federal savings and loan association shall suffer only forfeiture of the entire interest which the loan or obligation carries with it or which has been agreed to be paid thereon. If a greater sum or value has actually been paid, the borrower may recover twice the entire amount of the interest thus paid to the banking institution.¹⁴⁸

Particular penalties applying to banking institutions that execute usurious contracts were enacted to protect individuals and not corporations.¹⁴⁹ Therefore, the existence of such penalties will not enable a corporation that cannot otherwise employ civil usury as a defense to impose a penalty upon a bank where the loan would be usurious to an individual.¹⁵⁰...