Note and Mortgage Void as Usurious

The Second Department determined a loan transaction and the associated note and mortgage were void because the loan was usurious:

Under the civil usury statute, the maximum interest rate on a loan is 16% per annum (see General Obligations Law § 5-501[1]; Banking Law § 14-a[1]). General Obligations Law § 5-501(6)(a) provides that the 16% maximum interest rate is not applicable “to any loan or forbearance in the amount of [$250,000] or more, other than a loan or a forbearance secured primarily by an interest in real property improved by a one or two family residence.” * * *

To determine whether the interest charged exceeded the usury limit, we must apply the traditional method for calculating the effective interest rate as set forth in Band Realty Co. v North Brewster (37 NY2d 460, 462). Viewing the loan as a one-year loan, the total annual interest is $43,175 ($33,000 in annual interest at 12% on $275,000, plus $10,175 in retained interest fees). The net loan funds advanced, i.e., the loan principal ($275,000) minus the retained interest ($10,175), equals $264,825. Expressed as a percentage of the net loan funds advanced, the $43,175 in total annual interest equals 16.3% of $264,825. The effective interest rate of 16.3% exceeds the civil usury limit, and the loan was therefore usurious.  Oliveto Holdings Inc v Rattenni, 2013 NY Slip Op 06844, 2nd Dept 10-23-13