Is the interest rate in this New Jersey note lawful?
Except as otherwise provided by law, no person may take above $6.00 for the forbearance of $100.00 for a year, or, where there is a WRITTEN contract specifying a rate of interest, above $16.00 for the forbearance of $100.00 for a year: that is, 6% oral and 16% written. Independently of those civil caps, any loan or forbearance bearing interest above 30% per annum is not a rate authorized or permitted by law, except that for a loan to a corporation, limited liability company or limited liability partnership the criminal ceiling is 50% per annum. The civil consequence is forfeiture of the interest, not the loan: in any action to enforce a note, bond, mortgage or contract on which more than the lawful rate was reserved or taken, "the amount or value actually lent, without interest or costs of the action, may be recovered, and no more", and any illegal interest already paid is deducted from that (§ 31:1-3). A separate ceiling governs business and agricultural loans of $1,000 or more: where the rate this section would otherwise allow exceeds what the lender could charge without it, the rate may not exceed 5% over the Federal Reserve Bank of New York discount rate or 90-day commercial paper rate on the day of the loan (§ 31:1-1(g)). A second grant of rate-setting power sits outside R.S. 31:1-1 altogether: notwithstanding that section, the commissioner may by regulation establish a rate of interest which may be charged on loans equal to the rate Federal law or regulation allows national banking associations, at any time when the rate so allowed by Federal law exceeds 8% per annum, and it does not reach loans secured by a first lien on real property carrying a structure of one to six dwelling units. Where another law refers to a rate as that "established by R.S. 31:1-1", the rate applicable is instead the one so established (§ 31:1-1.1). On the criminal side the degrees are graded: second degree above 50% per annum; third degree at or below 50% where the loan exceeds $1,000 and the borrower is not a corporation, LLC or LLP; otherwise a disorderly persons offense; and knowingly engaging in the business of usurious lending is a second-degree crime with a fine up to $250,000 (§ 2C:21-19(a)-(b)).
The trap
The civil cap has a hole a commercial lender must know about and a consumer lender must not rely on: under § 31:1-1(e)(1) loans of $50,000.00 or more may bear ANY rate the parties agree, unless the security is a first lien on real property with one to six dwelling units, and the rate stated at origination may be taken even though repayments later drop the balance below $50,000. Exempt from the civil cap does NOT mean exempt from the criminal statute: N.J.S. 2C:21-19 still caps the transaction at 30% (50% for corporate, LLC and LLP borrowers), and criminal usury is a second-degree crime above 50%. Note also that the Commissioner of Banking may by regulation raise the ceiling for a loan secured by a first lien on real property carrying a structure of one to six dwelling units, to a value not more than the Monthly Index of Long Term United States Government Bond Yields for the second preceding calendar month plus an additional 8% per annum rounded off to the nearest quarter of 1% per annum (§ 31:1-1(b), (b)(1)); where such a regulation is in force the statutory 16% is not the operative number for that class of loan.
7 authorities
- statuteN.J. Stat. Ann. § 31:1-1enactment date not established
The words that state the rule
(a) Except as herein and otherwise provided by law, no person shall, upon contract, take, directly or indirectly for loan of any money, wares, merchandise, goods and chattels, above the value of $6.00 for the forbearance of $100.00 for a year, or when there is a written contract specifying a rate of interest, no person shall take above the value of $16.00 for the forbearance of $100.00 for a year.
- statuteN.J. Stat. Ann. § 31:1-1enactment date not established
The words that state the rule
(b) Notwithstanding the limitations of subsection (a) of this section, the Commissioner of Banking may by regulations adopted, amended and rescinded from time to time, provide that the value which may be taken for any loan secured by a first lien on real property as described in paragraph (1) of this subsection shall be a value more than $6.00 but not more than the Monthly Index of Long Term United States Government Bond Yields, compiled by the Board of Governors of the Federal Reserve System and as published by said Board of Governors in the monthly Federal Reserve Bulletin, for the second preceding calendar month plus an additional 8% per annum rounded off to the nearest quarter of 1% per annum. Within the limits as provided by this subsection, and if he finds it to be in the best interests of the citizens and economy of this State, the commissioner may establish: (1) A rate of interest on loans secured by a first lien on real property on which there is erected or to be erected a structure containing one, two, three, four, five or six dwelling units, a portion of which structure may be used for nonresidential purposes.
- statuteN.J. Stat. Ann. § 2C:21-19enactment date not established
The words that state the rule
a. Criminal usury. A person is guilty of criminal usury when not being authorized or permitted by law to do so, he: (1) Loans or agrees to loan, directly or indirectly, any money or other property at a rate exceeding the maximum rate permitted by law; or (2) Takes, agrees to take, or receives any money or other property as interest on the loan or on the forbearance of any money or other interest in excess of the maximum rate permitted by law. For the purposes of this section and notwithstanding any law of this State which permits as a maximum interest rate a rate or rates agreed to by the parties of the transaction, any loan or forbearance with an interest rate which exceeds 30% per annum shall not be a rate authorized or permitted by law, except if the loan or forbearance is made to a corporation, limited liability company or limited liability partnership any rate not in excess of 50% per annum shall be a rate authorized or permitted by law. Criminal usury is a crime of the second degree if the rate of interest on any loan made to any person exceeds 50% per annum or the equivalent rate for a longer or shorter period. It is a crime of the third degree if the interest rate on any loan made to any person except a corporation, limited liability company or limited liability partnership does not exceed 50% per annum but the amount of the loan or forbearance exceeds $1,000.00. Otherwise, making a loan to any person in violation of subsections a.(1) and a.(2) of this section is a disorderly persons offense. b. Business of criminal usury. Any person who knowingly engages in the business of making loans or forbearances in violation of subsection a. of this section is guilty of a crime of the second degree and, notwithstanding the provisions of N.J.S. 2C:43-3, shall be subject to a fine of not more than $250,000.00 and any other appropriate disposition authorized by N.J.S. 2C:43-2b.
- statuteN.J. Stat. Ann. § 31:1-1enactment date not established
The words that state the rule
(e) Notwithstanding the provisions of paragraph (a) or (b) of this section, contracts for the following classes or types of loans may provide for any rate of interest which the parties agree upon, and interest at any such rate may be taken, notwithstanding that it exceeds a rate limited by paragraph (a) or (b) of this section: (1) Loans in the amount of $50,000.00 or more, except loans where the security given is a first lien on real property on which there is erected or to be erected a structure containing one, two, three, four, five or six dwelling units, a portion of which structure may be used for nonresidential purposes. The rate of interest stated in such contract upon the origination of such loans may be taken notwithstanding that payments thereon reduce the amount outstanding to less than $50,000.00;
- statuteN.J. Stat. Ann. § 31:1-1enactment date not established
The words that state the rule
(g) Notwithstanding any other provisions of this section, if the applicable rate prescribed in this subsection exceeds the rate a person would be permitted to charge in the absence of this subsection, the rate of interest which may be taken on a loan for a business or agricultural purpose in the amount of $1,000.00 or more may not exceed 5% in excess of the discount rate, including any surcharge thereon, or any 90-day commercial paper in effect at the Federal Reserve Bank of New York on the day when such loan is made.
- statuteN.J. Stat. Ann. § 31:1-3enactment date not established
The words that state the rule
In all actions to enforce any note, bill, bond, mortgage, contract, covenant, conveyance, or assurance, for the payment or delivery of any money, wares, merchandise, goods, or chattels lent, and on which a higher rate of interest shall be reserved or taken than was or is allowed by the law of the place where the contract was made or is to be performed, the amount or value actually lent, without interest or costs of the action, may be recovered, and no more. If any premium or illegal interest shall have been paid to the lender, the sum or sums so paid shall be deducted from the amount that may be due as aforesaid, and recovery had for the balance only.
- statuteN.J. Stat. Ann. § 31:1-1.1enactment date not established
The words that state the rule
Notwithstanding any provisions of R.S. 31:1-1 to the contrary, the commissioner may by regulation establish a rate of interest which may be charged by any person on loans made by them equal to the rate allowed by Federal law or regulation to be charged by national banking associations at any time when the rate so allowed by Federal law exceeds 8% per annum. Nothing herein shall authorize any person to make any loan which he is not authorized by law to make, nor shall anything in this act apply to loans secured by a first lien on real estate on which there is erected or to be erected a structure containing one, two, three, four, five or six dwelling units, a portion of which structure may also be used for nonresidential purposes. Where in any other law a rate of interest applicable to loans regulated by this section is referred to as that established by R.S. 31:1-1, the rate applicable shall be as established herein.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.