What interest rate can this loan carry under Minnesota law, and what happens if it is too high?
The general rule in Minn. Stat. § 334.01, subd. 1 is that interest for any legal indebtedness is $6 upon $100 for a year unless a different rate is contracted for in writing, and that no person shall directly or indirectly take or receive, in money, goods, things in action or in any other way, any greater sum or value for the loan or forbearance of money, goods or things in action than $8 on $100 for one year. Two exemptions matter more than the cap. Notwithstanding any law to the contrary (with the exceptions the subdivision names for § 58.137 and § 47.20, subd. 4a), NO limitation on the rate or amount of interest, points, finance charges, fees or other charges applies to a loan, mortgage, credit sale or advance made under a written contract signed by the debtor for the extension of credit of $100,000 OR MORE, or to any written extension or modification of it, and "The written contract, written extension, and written modification are exempt from the other provisions of this chapter" (§ 334.01, subd. 2), so the remedies below do not reach a written contract of $100,000 or more. And for a loan or forbearance of LESS than $100,000 for business or agricultural purposes, a person may charge not more than 4-1/2 percent in excess of the discount rate on 90-day commercial paper in effect at the Federal Reserve Bank in the Federal Reserve District encompassing Minnesota (§ 334.011, subd. 1). Remedies: a contract reserving more than the statute prescribes is VOID except as to a holder in due course (§ 334.03), subject to the section's own exceptions: a merely clerical error in computing interest made without intent to avoid the chapter is not usury, payment of interest in advance for a year or less at a rate not exceeding eight percent is not usury, and where the original holder of a usurious note sells it to an innocent purchaser the maker "may recover back from the original holder the amount of principal and interest paid on the note"; a borrower who paid more than § 334.01 allows may recover the full amount of interest or premium paid, with costs, if the action is brought within TWO YEARS of payment (§ 334.02); and under § 334.011, subd. 2 an excessive business or agricultural rate forfeits the entire interest due, and a borrower who paid it may recover twice the interest paid.
The trap
The lender exemptions in the sections next door can flip the answer completely. Both § 334.02 and § 334.03 say in terms that they do 'not apply when the loan or forbearance is made by a lender and the lender is subject to section 47.59 or 48.196 or chapter 56 in connection with the loan or forbearance', and each defines 'lender' to include state banks and savings banks, federally chartered savings associations and savings banks, chapter 51A savings associations, federal and chapter 52 credit unions, chapter 53 industrial loan and thrift companies, chapter 56 licensed lenders, and HUD- or VA-approved mortgagees, so for most institutional lenders neither the voiding rule nor the two-year recovery action is available on these sections' words. Two more points from the text. The business and agricultural rate in § 334.011 is measured once: if the rate was permitted when the loan was made, it does not later become usurious because of a fluctuation in the federal discount rate (subd. 3), and no loan may be made under that subdivision if the proceeds finance the purchase or maintenance of real estate used principally for the borrower's residence. And § 334.01, subd. 1 makes a post-maturity rate INCREASE work a forfeiture of the entire interest, with exceptions for instruments bearing no interest before maturity and for maturity extensions capped at $8 on $100 per year. Federal preemption is out of scope for this rule. The same chapter carries a compounding rule the cap does not mention: “In the computation of interest upon any bond, note, or other instrument or agreement, interest shall not be compounded, but any contract to pay interest, not usurious, upon interest overdue, shall not be construed to be usury.” So compounding is barred in the computation, while a separate, non-usurious agreement to pay interest on overdue interest is treated differently.
12 authorities
- statuteMinn. Stat. § 334.01enactment date not established
The words that state the rule
The interest for any legal indebtedness shall be at the rate of $6 upon $100 for a year, unless a different rate is contracted for in writing. No person shall directly or indirectly take or receive in money, goods, or things in action, or in any other way, any greater sum, or any greater value, for the loan or forbearance of money, goods, or things in action, than $8 on $100 for one year.
- statuteMinn. Stat. § 334.01enactment date not established
The words that state the rule
Notwithstanding any law to the contrary, except as stated in section 58.137 , and with respect to a conventional loan or contract for deed, section 47.20 , subdivision 4a, no limitation on the rate or amount of interest, points, finance charges, fees, or other charges applies to a loan, mortgage, credit sale, or advance made under a written contract, signed by the debtor, for the extension of credit to the debtor in the amount of $100,000 or more, or any written extension and other written modification of the written contract. The written contract, written extension, and written modification are exempt from the other provisions of this chapter.
- statuteMinn. Stat. § 334.011enactment date not established
The words that state the rule
Notwithstanding the provisions of any law to the contrary a person may, in the case of a contract for the loan or forbearance of money, goods, or other things in action in an amount of less than $100,000 for business or agricultural purposes, charge interest at a rate of not more than 4-1/2 percent in excess of the discount rate on 90-day commercial paper in effect at the Federal Reserve Bank in the Federal Reserve District encompassing Minnesota. For the purposes of this subdivision, the term "business" means a commercial or industrial enterprise which is carried on for the purpose of active or passive investment or profit. For the purposes of this subdivision, the term "agricultural" means the production, harvest, exhibition, marketing, transportation, processing, or manufacture of agricultural products, including horticultural, viticultural, and dairy products, livestock, wildlife, poultry, bees, forest products, fish and shellfish, and any parts thereof, including processed and manufactured products, and any and all products raised or produced on farms and any processed or manufactured products thereof.
- statuteMinn. Stat. § 334.011enactment date not established
The words that state the rule
If a greater rate of interest than that permitted by subdivision 1 is charged then the entire interest due on that note, bill or other evidence of debt is forfeited. If the greater rate of interest has been paid, the person who paid it may recover in a civil action an amount equal to twice the amount of interest paid.
- statuteMinn. Stat. § 334.011enactment date not established
The words that state the rule
If the rate of interest charged is permitted by this section at the time the loan was made, that rate of interest does not later become usurious because of a fluctuation in the federal discount rate.
- statuteMinn. Stat. § 334.02enactment date not established
The words that state the rule
Every person who for any such loan or forbearance shall have paid or delivered any greater sum or value than in section 334.01 allowed to be received may, personally or through personal representatives, recover in an action against the person who shall have received the same, or the receiver's personal representatives, the full amount of interest or premium so paid, with costs, if action is brought within two years after such payment or delivery.
- statuteMinn. Stat. § 334.03enactment date not established
The words that state the rule
All bonds, bills, notes, mortgages, and all other contracts and securities, and all deposits of goods, or any other thing, whereupon or whereby there shall be reserved, secured, or taken any greater sum or value for the loan or forbearance of any money, goods, or things in action than prescribed, except such instruments which are taken or received in accordance with and in reliance upon the provisions of any statute, shall be void except as to a holder in due course. No merely clerical error in the computation of interest, made without intent to avoid the provisions of this chapter, shall constitute usury. Interest at the rate of 1/12 of eight percent for every 30 days shall not be construed to exceed eight percent per annum; nor shall the payment of interest in advance of one year, or any less time, at a rate not exceeding eight percent per annum constitute usury; and nothing herein shall prevent the purchase of negotiable mercantile paper, usurious or otherwise, for a valuable consideration, by a purchaser without notice, at any price before the maturity of the same, when there has been no intent to evade the provisions of this chapter, or where such purchase has not been a part of the original usurious transactions; but where the original holder of a usurious note sells the same to an innocent purchaser, the maker thereof, or the maker's representatives, may recover back from the original holder the amount of principal and interest paid on the note. This section does not apply when the loan or forbearance is made by a lender and the lender is subject to section 47.59 or 48.196 or chapter 56 in connection with the loan or forbearance.
- statuteMinn. Stat. § 334.01enactment date not established
The words that state the rule
In the computation of interest upon any bond, note, or other instrument or agreement, interest shall not be compounded, but any contract to pay interest, not usurious, upon interest overdue, shall not be construed to be usury.
- statuteMinn. Stat. § 334.02enactment date not established
The words that state the rule
This section does not apply when the loan or forbearance is made by a lender and the lender is subject to section 47.59 or 48.196 or chapter 56 in connection with the loan or forbearance. For purposes of this section, the term "lender" means a bank or savings bank organized under the laws of this state, a federally chartered savings association or savings bank, a savings association organized under chapter 51A, a federally chartered credit union, a credit union organized under chapter 52, an industrial loan and thrift company organized under chapter 53, a licensed lender under chapter 56, or a mortgagee or lender approved or certified by the secretary of housing and urban development or approved or certified by the administrator of veterans affairs.
- statuteMinn. Stat. § 334.03enactment date not established
The words that state the rule
For purposes of this section, the term "lender" means a bank or savings bank organized under the laws of this state, a federally chartered savings association or savings bank, a savings association organized under chapter 51A, a federally chartered credit union, a credit union organized under chapter 52, an industrial loan and thrift company organized under chapter 53, a licensed lender under chapter 56, or a mortgagee or lender approved or certified by the secretary of housing and urban development or approved or certified by the administrator of veterans affairs.
- statuteMinn. Stat. § 334.011enactment date not established
The words that state the rule
No loan shall be made pursuant to this subdivision if the proceeds of the loan are used to finance the purchase or maintenance of real estate used principally for the borrower's residence.
- statuteMinn. Stat. § 334.01enactment date not established
The words that state the rule
Contracts shall bear the same rate of interest after they become due as before, and any provision in any contract, note, or instrument providing for an increase of the rate of interest after maturity, or any increase therein after making and delivery, shall work a forfeiture of the entire interest; but this provision shall not apply to notes or contracts which bear no interest before maturity nor shall it apply to any agreement which extends the maturity date of any contract, note, or instrument, and provides for an increased rate of interest after the original maturity date on the indebtedness then due. Any agreement which extends maturity date of any contract, note or instrument shall not provide for an increased rate of interest in excess of $8 on $100 for one year.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.