What rate cap applies to a Connecticut loan, and what happens if the lender exceeds it?
No person, firm or corporation other than a pawnbroker as provided in § 21-44 may loan money and charge, or agree to receive, interest greater than twelve per cent per annum (§ 37-4), and 'No action shall be brought to recover principal or interest, or any part thereof' on a loan prohibited by §§ 37-4 to 37-6, or on any cause arising from its negotiation (§ 37-8): the bar reaches principal as well as interest. Section 37-9 lists loans the cap does not affect, including loans by any bank as defined in § 36a-2, by an out-of-state bank that maintains a branch in Connecticut, by a wholly-owned subsidiary of either (except a loan for consumer purposes) and by Connecticut or federal credit unions; any bona fide mortgage of real property for a sum over $5,000; commercial loans over $10,000 up to $250,000 at not more than the deposit index plus seventeen per cent, and, for advances under a revolving loan agreement, where the total principal then owing to the lender is in that band; and commercial loans over $250,000 with no rate limit in the text, likewise measured by the total principal then owing for revolving advances. In Ferrigno the court held § 37-9(3) exempts a bona fide real estate mortgage LOAN over $5,000, so a deficiency judgment may be had on it despite an interest rate over twelve per cent; the court overruled Atlas Realty to the extent that decision read the term “mortgage” in § 37-9 (3) as the conveyance only, and the judgment of the Appellate Court was affirmed.
The trap
The penalty reaches principal: § 37-8 bars an action to recover 'principal or interest, or any part thereof' on a prohibited loan, so an unsecured private loan above twelve per cent to an individual can be uncollectable in full. § 37-9 leaves one route open: 'No provision of this section shall prevent any such bank, out-of-state bank, Connecticut credit union or federal credit union or other lender from recovering by an action at law the amount of the principal and the interest stipulated or interest at the legal rate, if interest is not stipulated, in any negotiable instrument which it has acquired for value and in good faith without notice of illegality in the consideration.' The business-loan exemptions in § 37-9(4) depend on facts, not labels: a borrower 'engaged primarily in commercial, manufacturing, industrial or nonconsumer pursuits' whose funds are used in its business and not for consumer purposes. A loan to an individual for consumer purposes is outside them. 'Interest' for § 37-9 does not include attorney's fees, title search, closing, survey or recording fees paid by the borrower, but § 37-6 counts expenses of inquiry into the borrower's financial responsibility and of negotiating the loan toward the twelve per cent.
11 authorities
- statuteConn. Gen. Stat. § 37-4enactment date not established
The words that state the rule
No person and no firm or corporation or agent thereof, other than a pawnbroker as provided in section 21-44 , shall, as guarantor or otherwise, directly or indirectly, loan money to any person and, directly or indirectly, charge, demand, accept or make any agreement to receive therefor interest at a rate greater than twelve per cent per annum.
- statuteConn. Gen. Stat. § 37-8enactment date not established
The words that state the rule
No action shall be brought to recover principal or interest, or any part thereof, on any loan prohibited by sections 37-4 , 37-5 and 37-6 , or upon any cause arising from the negotiation of such loan.
- statuteConn. Gen. Stat. § 37-9enactment date not established
The words that state the rule
The provisions of sections 37-4 , 37-5 and 37-6 shall not affect: (1) Any loan made prior to September 12, 1911; (2) any loan made by (A) any bank, as defined in section 36a-2 , or any out-of-state bank, as defined in section 36a-2 , that maintains in this state a branch, as defined in section 36a-410 , (B) any wholly-owned subsidiary of such bank or out-of-state bank, except a loan for consumer purposes, or (C) any Connecticut credit union, as defined in section 36a-2 , or federal credit union, as defined in section 36a-2
- statuteConn. Gen. Stat. § 37-9enactment date not established
The words that state the rule
(3) any bona fide mortgage of real property for a sum in excess of five thousand dollars
- statuteConn. Gen. Stat. § 37-9enactment date not established
The words that state the rule
(B) any loan made to a foreign or domestic corporation, statutory trust, limited liability company, general, limited or limited liability partnership or association organized for a profit or any individual, provided such corporation, trust, company, partnership, association or individual is engaged primarily in commercial, manufacturing, industrial or nonconsumer pursuits and provided further that the funds received by such corporation, trust, company, partnership, association or individual are utilized in such entity's business or investment activities and are not utilized for consumer purposes and provided further that the original indebtedness to be repaid is in excess of two hundred fifty thousand dollars, or, in the case of one or more advances of money of less than two hundred fifty thousand dollars made pursuant to a revolving loan agreement or similar agreement or a loan agreement providing for the making of advances to the borrower from time to time up to an aggregate maximum amount, the total principal amount of all loans owing by the borrower to the lender at the time of any such advance is in excess of two hundred fifty thousand dollars;
- case244 Conn. 189Ferrigno v. Cromwell Development AssociatesConn.decided 1998read it at the source ↗
The words that state the rule
We conclude that § 37-9 (3) exempts a bona fide real estate mortgage loan of over $5000 from the purview of § 37-4 and consequently permits a deficiency judgment on such a loan with an interest rate in excess of 12 percent per annum.
- statuteConn. Gen. Stat. § 37-6enactment date not established
The words that state the rule
No person and no firm or corporation, or agent thereof, shall charge a borrower with any expense of inquiry as to his financial responsibility or expense of negotiating a loan, or charge, at the time of making the loan, the expense of collecting the interest and principal of the loan, unless the total of such charges and of the interest agreed upon is, during any one year, twelve per cent of the loan or less.
- statuteConn. Gen. Stat. § 37-9enactment date not established
The words that state the rule
(4) (A) any loan, carrying an annual interest rate of not more than the deposit index, as determined under section 36a-26 , for the calendar year in which the loan is made plus seventeen per cent, made to a foreign or domestic corporation, statutory trust, limited liability company, general, limited or limited liability partnership or association organized for a profit or any individual, provided such corporation, trust, company, partnership, association or individual is engaged primarily in commercial, manufacturing, industrial or nonconsumer pursuits and provided further that the funds received by such corporation, trust, company, partnership, association or individual are utilized in such entity's business or investment activities and are not utilized for consumer purposes and provided further that the original indebtedness to be repaid is in excess of ten thousand dollars but less than or equal to two hundred fifty thousand dollars, or, in the case of one or more advances of money of less than ten thousand dollars made pursuant to a revolving loan agreement or similar agreement or a loan agreement providing for the making of advances to the borrower from time to time up to an aggregate maximum amount, the total principal amount of all loans owing by the borrower to the lender at the time of any such advance is in excess of ten thousand dollars but less than or equal to two hundred fifty thousand dollars
- statuteConn. Gen. Stat. § 37-9enactment date not established
The words that state the rule
For the purpose of this section: “Interest” shall not be construed to include attorney's fees, including preparation of mortgage deed and note, security agreements, title search, waivers and closing fees, survey charges or recording fees paid by the mortgagor or borrower; and “consumer purposes” means the utilization of funds for personal, family or household purchases, acquisitions or uses.
- statuteConn. Gen. Stat. § 37-9enactment date not established
The words that state the rule
No provision of this section shall prevent any such bank, out-of-state bank, Connecticut credit union or federal credit union or other lender from recovering by an action at law the amount of the principal and the interest stipulated or interest at the legal rate, if interest is not stipulated, in any negotiable instrument which it has acquired for value and in good faith without notice of illegality in the consideration.
- case244 Conn. 189Ferrigno v. Cromwell Development AssociatesConn.decided 1998read it at the source ↗
The words that state the rule
To the extent that this court’s decision in Atlas Realty Corp. indicated that the term “mortgage” in § 37-9 (3) refers only to the mortgage conveyance and not to the mortgage loan, that decision is overruled. We conclude, therefore, that the defense of usury is not available to the defendants because § 37-9 (3) exempts the secured loan, not only the mortgage conveyance securing the loan, from the operation of § 37-4. The judgment of the Appellate Court is affirmed.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.