Is the interest rate in this Nebraska contract lawful, and what happens if it is not?
The general ceiling is sixteen percent a year, but the exemption list is so wide that most commercial lending is outside it, and the penalty is loss of interest rather than a void contract. Neb. Rev. Stat. § 45-101.03(1): “any rate of interest which may be agreed upon, not exceeding sixteen percent per annum on the unpaid principal balance, shall be valid upon any loan or forbearance of money, goods, or things in action”. Neb. Rev. Stat. § 45-101.04 then takes fourteen categories out of it, and four of them decide most business deals: “Loans made to any corporation, partnership, limited liability company, or trust; (3) The guarantor or surety of any loan to a corporation, partnership, limited liability company, or trust;”, “Loans made when the aggregate principal amount of the indebtedness is one hundred thousand dollars or more of the borrower to any one financial institution, licensee, or permittee;”, loans by Department of Banking and Finance licensees and by FDIC- or NCUA-insured institutions “made primarily for business or agricultural purposes or secured by real property”, and trade credit: “Interest charges made on open credit accounts by a person who sells goods or services on credit when the interest charges do not exceed one and one-third percent per month for any charges which remain unpaid for more than thirty days following rendition of the statement of account”, which is exactly sixteen percent a year. If the cap IS exceeded, § 45-105 is the remedy and it is not rescission: “the contract shall not on that account be void, but if in any action on such contract, proof be made that illegal interest has been directly or indirectly contracted for, or taken, or reserved, the plaintiff shall recover only the principal, without interest, and the defendant shall recover costs”, and “if interest shall have been paid thereon, judgment shall be for the principal, deducting interest paid”. Thomas Lakes Owners Ass'n v. Riley applied it to a homeowners' association whose bylaws charged 1.5 percent per thirty days: “At trial, the Association admitted to charging 1.5 percent per month, a rate equaling 18 percent per year, on the uncollected assessment amounts”, and the court modified the judgment “to find as a matter of law that the interest provision in the bylaws, if found to be validly adopted, is usurious.” Where no rate is agreed, the fallback depends on what the obligation is. On money due on an instrument in writing, Neb. Rev. Stat. § 45-104 supplies twelve percent: “Unless otherwise agreed, interest shall be allowed at the rate of twelve percent per annum on money due on any instrument in writing”. On a loan or forbearance with no agreed rate, Neb. Rev. Stat. § 45-102 supplies SIX percent, and has done since 1 September 1983: “Interest upon the loan or forbearance of money, goods or things in action shall be at the rate of twelve percent per annum for the period commencing on March 19, 1980, through August 31, 1983, and at the rate of six percent per annum commencing on September 1, 1983, on the unpaid principal balance, unless a greater rate, not exceeding the rate of interest provided in section 45-101.03 , be contracted for by the parties.”
The trap
The 1.5-percent-per-month late charge is the Nebraska trap, and it is in almost every form contract. One and a half percent a month is eighteen percent a year, over the cap, and the drafter who wrote it was probably copying the trade-credit exemption in § 45-101.04(7), which allows only “one and one-third percent per month”. A third of a point per month is the difference between a lawful default rate and losing every dollar of interest, including the prejudgment interest you would otherwise have had: Thomas Lakes holds that on remand “the Association should only recover the principal, without interest, and the Owners should recover costs, pursuant to § 45-105”, and reports Central Constr. Co. v. Blanchard as stating that § 45-105 “is a special statute governing usurious contracts, taking precedence over the general statute providing for interest on judgments in cases where usury is established”. Second trap: the exemptions turn on WHO the borrower is, not on the size of the deal alone, so the same eighteen percent note is unimpeachable against a corporate or LLC borrower and fatal against an individual, and a personal guarantor of an entity loan is inside the exemption by § 45-101.04(3) rather than outside it. Third: “interest” is defined narrowly by § 45-101.02 and excludes “loan service costs” (prepayment charges, delinquency charges, insurance premiums, escrow, appraisal, title, origination fees and more), so a Nebraska lender's real cost of funds can exceed the cap lawfully, while “discount points, if any, shall be amortized over the original term of the loan” for the purpose of computing the rate. Fourth, and this is what this rule does NOT tell you: there is no Nebraska authority here on whether a savings clause (“in no event shall interest exceed the maximum permitted by law”) rescues an otherwise usurious rate. Do not rely on one.
17 authorities
- statuteNeb. Rev. Stat. § 45-101.03enactment date not established
The words that state the rule
Except as provided in section 45-101.04 , any rate of interest which may be agreed upon, not exceeding sixteen percent per annum on the unpaid principal balance, shall be valid upon any loan or forbearance of money, goods, or things in action
- statuteNeb. Rev. Stat. § 45-101.04enactment date not established
The words that state the rule
The limitation on the rate of interest provided in section 45-101.03 shall not apply to:
- statuteNeb. Rev. Stat. § 45-101.04enactment date not established
The words that state the rule
Loans made to any corporation, partnership, limited liability company, or trust; (3) The guarantor or surety of any loan to a corporation, partnership, limited liability company, or trust;
- statuteNeb. Rev. Stat. § 45-101.04enactment date not established
The words that state the rule
Loans made when the aggregate principal amount of the indebtedness is one hundred thousand dollars or more of the borrower to any one financial institution, licensee, or permittee;
- statuteNeb. Rev. Stat. § 45-101.04enactment date not established
The words that state the rule
Interest charges made on open credit accounts by a person who sells goods or services on credit when the interest charges do not exceed one and one-third percent per month for any charges which remain unpaid for more than thirty days following rendition of the statement of account;
- statuteNeb. Rev. Stat. § 45-101.04enactment date not established
The words that state the rule
Loans made primarily for business or agricultural purposes or secured by real property when such loans are made (a) by a licensee, registrant, or permittee operating under a license, registration, or permit duly issued by the Department of Banking and Finance except for licensees operating under the Nebraska Installment Loan and Sales Act, (b) by any financial institution insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration, or (c) by any insurance company organized under the laws of this state and subject to regulation by the Department of Insurance;
- statuteNeb. Rev. Stat. § 45-101.02enactment date not established
The words that state the rule
Interest means the compensation agreed upon or allowed by law upon any loan or forbearance of money, goods, or things in action but does not include loan service costs;
- statuteNeb. Rev. Stat. § 45-101.02enactment date not established
The words that state the rule
For the purpose of determining the rate of interest on any loan, discount points, if any, shall be amortized over the original term of the loan.
- statuteNeb. Rev. Stat. § 45-105enactment date not established
The words that state the rule
If a greater rate of interest than is allowed in section 45-101.03 shall be contracted for or received or reserved, the contract shall not on that account be void, but if in any action on such contract, proof be made that illegal interest has been directly or indirectly contracted for, or taken, or reserved, the plaintiff shall recover only the principal, without interest, and the defendant shall recover costs; and if interest shall have been paid thereon, judgment shall be for the principal, deducting interest paid
- statuteNeb. Rev. Stat. § 45-104enactment date not established
The words that state the rule
Unless otherwise agreed, interest shall be allowed at the rate of twelve percent per annum on money due on any instrument in writing
- case612 N.W.2d 529Thomas Lakes Owners Ass'n v. RileyNeb. Ct. App.decided 2000read it at the source ↗
The words that state the rule
At trial, the Association admitted to charging 1.5 percent per month, a rate equaling 18 percent per year, on the uncollected assessment amounts.
- case612 N.W.2d 529Thomas Lakes Owners Ass'n v. RileyNeb. Ct. App.decided 2000read it at the source ↗
The words that state the rule
We modify the district court’s order to find as a matter of law that the interest provision in the bylaws, if found to be validly adopted, is usurious.
- case612 N.W.2d 529Thomas Lakes Owners Ass'n v. RileyNeb. Ct. App.decided 2000read it at the source ↗
The words that state the rule
the Association should only recover the principal, without interest, and the Owners should recover costs, pursuant to § 45-105.
- case612 N.W.2d 529Thomas Lakes Owners Ass'n v. RileyNeb. Ct. App.decided 2000read it at the source ↗
The words that state the rule
the court states that where the defense of usury is established, the plaintiff is not entitled to interest on the judgment awarded.
- case612 N.W.2d 529Thomas Lakes Owners Ass'n v. RileyNeb. Ct. App.decided 2000read it at the source ↗
The words that state the rule
The court goes on to state that § 45-105 is a special statute governing usurious contracts, taking precedence over the general statute providing for interest on judgments in cases where usury is established.
- statuteNeb. Rev. Stat. § 45-102enactment date not established
The words that state the rule
Interest upon the loan or forbearance of money, goods or things in action shall be at the rate of twelve percent per annum for the period commencing on March 19, 1980, through August 31, 1983, and at the rate of six percent per annum commencing on September 1, 1983, on the unpaid principal balance, unless a greater rate, not exceeding the rate of interest provided in section 45-101.03 , be contracted for by the parties.
- statuteNeb. Rev. Stat. § 45-101.04enactment date not established
The words that state the rule
(13) Interest charges made on any goods or services sold under an installment contract pursuant to the Nebraska Installment Loan and Sales Act. Subject to section 45-365 , it shall be lawful to contract for and receive any rate of interest on such contract as the parties may expressly agree to in writing; or (14) Fees which may be charged by a licensee for services pursuant to the Delayed Deposit Services Licensing Act.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.