Usury-avoidance provision in a mortgage is useless

Real Estate Weekly, Sept 15, 1999 by Edward L. Schiff

Judge Deane ruled that the policy behind usury laws is clearly to protect unsuspecting vulnerable people, and therefore allowing a lender to avoid the usury laws by including a "usury-avoidance" provision undermines that policy. Otherwise, the lender will benefit from the usurious interest rate unless the contract is challenged, and then the lender would merely forfeit the excess interest. The statute clearly contemplates more, said the Judge. Judge Deane concluded that the "usury-avoidance" provision does not save the otherwise usurious loan, and since the loan is usurious, it is void. The lender in this case has no legal right to the excess money resulting from the foreclosure sale. The borrower, the mortgagor, is entitled to those funds.

Since the Federal Home Loan Mortgage Corporation is not a bank or a savings and loan association, its entire mortgage was lost. Had the lender been a bank, it would have been entitled to only that amount of surplus funds which would repay the principal amount of the loan, but would have forfeited all of the interest on the loan.

(Edward L. Schiff is a real estate partner in the Manhattan law firm of Hartman & Craven, LLP.)