What interest rate can this loan carry, and what happens if it is too high?
The civil ceiling is set by GOL § 5-501(1) by reference to Banking Law § 14-a, which fixes it: "The maximum rate of interest provided for in section 5-501 of the general obligations law shall be sixteen per centum per annum" (§ 14-a(1)). Two carve-outs sit on that ceiling before any dollar band is reached. Section 5-501(1) applies "except as provided in subdivisions five and six of this section or as otherwise provided by law", and subdivision 5 lifts every maximum-rate law off a loan insured or guaranteed by the federal housing commissioner or under the "Servicemen's Readjustment Act of 1944", whatever its size (§ 5-501(5)). And § 14-a itself says that nothing in it "shall be deemed to prohibit the charging of interest at the rates provided or permitted by United States Public Laws 96-161, 96-221 and 96-399, where applicable" (§ 14-a(7)). Subdivision 2 then does the prohibiting (no person or corporation shall, directly or indirectly, charge, take or receive interest at a rate exceeding the rate prescribed), and defines what counts: interest includes all amounts paid or payable, directly or indirectly, to or for the account of the lender in consideration for making the loan, as defined by the superintendent of financial services (§ 5-501(2)). A contract reserving or taking a greater sum than § 5-501 allows is VOID under GOL § 5-511(1) (except that a savings bank or savings and loan association that knowingly does so forfeits the entire interest instead), and the court is directed to declare it void, enjoin prosecution on it and order it surrendered and cancelled (§ 5-511(2)). No law regulating the maximum rate, except Penal Law §§ 190.40 and 190.42, applies to a loan or forbearance of $250,000 or more that is not secured primarily by an interest in real property improved by a one- or two-family residence (§ 5-501(6)(a)), and no such law, including those Penal Law sections, applies to a loan or forbearance of $2,500,000 or more (§ 5-501(6)(b)). A corporation may not interpose the defence of usury (§ 5-521(1)) except a defence of criminal usury under Penal Law § 190.40 (§ 5-521(3)), which requires knowingly charging, taking or receiving interest at a rate exceeding 25 percent per annum and is a class E felony. Answering two questions certified by the Second Circuit, and answering both in the affirmative, the Court of Appeals held that a usurious loan to a corporation is wholly void under the General Obligations Law, principal and interest alike, and that a stock-conversion option is to be considered in determining the interest charged (Adar Bays; opinion by Wilson, J., with Garcia, J., dissenting in part on how conversion options are valued). That second answer carries its own conditions: what is counted is the VALUE of the floating-price option, included only "to the extent such value, when measured at the time of contracting, can be reasonably determined"; the "hypothetical possibility that a future exercise of a floating-price conversion option may result in a return exceeding 25% does not render a loan usurious on its face"; that value is "a question of fact, and the burden to prove that value is on the borrower"; the Court said it had not been asked how to value such options and did "not endorse any particular methodology"; and its decision "does nothing to alter the borrower's burden of establishing usury as a defense in a civil action". The voiding itself is likewise conditional on a defence actually succeeding: criminally usurious corporate loans are void "when a successful usury defense, based on the criminal usury rate, is raised". The rate is fixed when the loan is made: interest may not exceed the rate authorized by law at that time even under a prior commitment for more, and a later change in the § 14-a rate neither invalidates an earlier loan nor lets a rate-increase clause exceed the rate authorized when the loan was made (§ 5-501(4)). Subdivision 4-a is the express exception to that, and it is written as one: "Notwithstanding the provisions of subdivision four of this section", a loan repayable on demand whose initial principal is more than $5,000 and which the borrower may repay at any time, in whole or in part, without penalty may change its rate with variations in lending rates up to the rate authorized by law at the time of the change, subject to a ceiling that follows any later reduction down and a floor at the rate applicable when the loan was made (§ 5-501(4-a)). Criminal usury in the first degree (the same 25 percent, by an actor previously convicted of criminal usury or acting as part of a scheme or business of making or collecting usurious loans) is a class C felony (Penal Law § 190.42).
The trap
New York's remedy is forfeiture of the whole debt, not merely of the excess: Adar Bays holds that when usury is established the transaction is void and unenforceable, principal and interest alike, and that the legislature provided no exception to that voiding where the borrower is a corporation, corporate borrowers differ only in that they may raise criminal, but not civil, usury. The bands are where deals fail, and Adar Bays summarised them in 2021: loans under $250,000 to individuals cannot exceed a 16% annual rate, loans between $250,000 and $2.5 million cannot exceed 25%, and loans of $2.5 million or more are not subject to the usury laws (the 16% figure is Banking Law § 14-a(1)'s own text). Which band a deal sits in is measured on the committed total, not on the draw: a loan of $250,000 or more to be advanced in installments under a written agreement "shall be deemed to be a single loan for the total amount which the lender has agreed to advance" (§ 5-501(6)(a)), and advances aggregating $2,500,000 or more to any one borrower under a written agreement by one or more lenders are likewise a single loan or forbearance for that total (§ 5-501(6)(b)). So a $300,000 facility drawn $150,000 at a time is in the upper band, and a syndicated facility is measured across the lenders. A corporation cannot use the civil ceiling at ANY loan size; its only usury defence is criminal usury, with its knowing-charge element and 25 percent rate. Counting is the second trap, and it cuts both ways: fees and equity kickers paid to the lender in consideration of the loan count as interest under § 5-501(2), and Adar Bays counts a floating-price stock-conversion option, but what it counts is that option's VALUE "when measured at the time of contracting", and only "to the extent such value ... can be reasonably determined", the Court having declined to endorse any valuation method. The lender's side of the same holding is that the "hypothetical possibility that a future exercise of a floating-price conversion option may result in a return exceeding 25% does not render a loan usurious on its face": the option's value is "a question of fact, and the burden to prove that value is on the borrower". A corporate borrower's usury-defence waiver is void only inside that narrow carve-out: § 5-521(2) declares 'contrary to public policy and absolutely void' any contract provision or separate written instrument 'executed prior to, simultaneously with or within sixty days after the delivery of any moneys to any borrower in connection with such indebtedness, whereby the defense of usury is waived'. Section 5-521(2) is narrow: its voiding of usury-defence waivers executed before, with, or within sixty days after the loan applies within the carve-out for a corporation whose principal asset is a one- or two-family dwelling, not to corporate borrowers generally.
22 authorities
- statuteN.Y. GOB Law § 5-501enactment date not established
The words that state the rule
1. The rate of interest, as computed pursuant to this title, upon the loan or forbearance of any money, goods, or things in action, except as provided in subdivisions five and six of this section or as otherwise provided by law, shall be six per centum per annum unless a different rate is prescribed in section fourteen-a of the banking law.
- statuteN.Y. GOB Law § 5-501enactment date not established
The words that state the rule
2. No person or corporation shall, directly or indirectly, charge, take or receive any money, goods or things in action as interest on the loan or forbearance of any money, goods or things in action at a rate exceeding the rate above prescribed. The amount charged, taken or received as interest shall include any and all amounts paid or payable, directly or indirectly, by any person, to or for the account of the lender in consideration for making the loan or forbearance as defined by the superintendent of financial services pursuant to subdivision three of section fourteen-a of the banking law except such fee as may be fixed by the commissioner of taxation and finance as the cost of servicing loans made by the property and liability insurance security fund.
- statuteN.Y. GOB Law § 5-511enactment date not established
The words that state the rule
1. All bonds, bills, notes, assurances, conveyances, all other contracts or securities whatsoever, except bottomry and respondentia bonds and contracts, and all deposits of goods or other things whatsoever, whereupon or whereby there shall be reserved or taken, or secured or agreed to be reserved or taken, any greater sum, or greater value, for the loan or forbearance of any money, goods or other things in action, than is prescribed in section 5-501, shall be void, except that the knowingly taking, receiving, reserving or charging such a greater sum or greater value by a savings bank, a savings and loan association or a federal savings and loan association shall only be held and adjudged a forfeiture of the entire interest which the loan or obligation carries with it or which has been agreed to be paid thereon. If a greater sum or greater value has been paid, the person paying the same or his legal representative may recover from the savings bank, the savings and loan association or the federal savings and loan association twice the entire amount of the interest thus paid.
- statuteN.Y. GOB Law § 5-511enactment date not established
The words that state the rule
2. Except as provided in subdivision one, whenever it shall satisfactorily appear by the admissions of the defendant, or by proof, that any bond, bill, note, assurance, pledge, conveyance, contract, security or any evidence of debt, has been taken or received in violation of the foregoing provisions, the court shall declare the same to be void, and enjoin any prosecution thereon, and order the same to be surrendered and cancelled.
- statuteN.Y. GOB Law § 5-501enactment date not established
The words that state the rule
5. No law regulating the maximum rate of interest which may be charged, taken or received shall apply to any loan or forbearance insured by the federal housing commissioner or for which a commitment to insure has been made by the federal housing commissioner or to any loan or forbearance insured or guaranteed pursuant to the provisions of an act of congress entitled "Servicemen's Readjustment Act of 1944."
- statuteN.Y. GOB Law § 5-501enactment date not established
The words that state the rule
6. a. No law regulating the maximum rate of interest which may be charged, taken or received, except section 190.40 and section 190.42 of the penal law, shall apply to any loan or forbearance in the amount of two hundred fifty thousand dollars 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. A loan of two hundred fifty thousand dollars or more which is to be advanced in installments pursuant to a written agreement by a lender shall be deemed to be a single loan for the total amount which the lender has agreed to advance pursuant to such agreement on the terms and conditions provided therein.
- statuteN.Y. GOB Law § 5-501enactment date not established
The words that state the rule
b. No law regulating the maximum rate of interest which may be charged, taken or received, including section 190.40 and section 190.42 of the penal law, shall apply to any loan or forbearance in the amount of two million five hundred thousand dollars or more. Loans or forbearances aggregating two million five hundred thousand dollars or more which are to be made or advanced to any one borrower in one or more installments pursuant to a written agreement by one or more lenders shall be deemed to be a single loan or forbearance for the total amount which the lender or lenders have agreed to advance or make pursuant to such agreement on the terms and conditions provided therein.
- statuteN.Y. GOB Law § 5-521enactment date not established
The words that state the rule
1. No corporation shall hereafter interpose the defense of usury in any action. The term corporation, as used in this section, shall be construed to include all associations, and joint-stock companies having any of the powers and privileges of corporations not possessed by individuals or partnerships.
- statuteN.Y. GOB Law § 5-521enactment date not established
The words that state the rule
3. The provisions of subdivision one of this section shall not apply to any action in which a corporation interposes a defense of criminal usury as described in section 190.40 of the penal law.
- statuteN.Y. PEN Law § 190.40enactment date not established
The words that state the rule
A person is guilty of criminal usury in the second degree when, not being authorized or permitted by law to do so, he knowingly charges, takes or receives any money or other property as interest on the loan or forebearance of any money or other property, at a rate exceeding twenty-five per centum per annum or the equivalent rate for a longer or shorter period. Criminal usury in the second degree is a class E felony.
The words that state the rule
Our decision today does nothing to alter the borrower’s burden of establishing usury as a defense in a civil action. Rather, we answer only that which the Second Circuit has asked: stock conversion options should be considered when determining the interest charged on a loan transaction and usurious loans to corporations are wholly void under the General Obligations Law. We have not been asked how to determine the value of stock conversion options here and do not endorse any particular methodology.
The words that state the rule
The text, history, and purpose of New York’s usury laws demonstrate that, if the borrower establishes the defense of usury in a -4- -5- No. 51 civil action, the usurious loan transaction is deemed void and unenforceable, resulting in the uncollectability of both principal and interest. We now clarify that this same result obtains when the 25% interest rate cap set forth in Penal Law § 190.40—incorporated by reference in General Obligations Law § 5-521 (3)—applies to a loan to a corporation and the interest charged on the loan exceeds that cap.
The words that state the rule
General Obligations Law § 5-511 (1) provides that all loans charging an interest rate greater than that permitted in section 5-501 “shall be void.” A criminally usurious rate higher than 25% is an interest rate greater than the civil usury limit of 16% prescribed in section 5-501. The legislature provided no exceptions to the voiding of usurious loans if the borrower is a corporation. Rather, the General Obligations Law treats corporate borrowers differently only to the extent that corporate borrowers may raise criminal usury, but not civil usury, as a defense. The statutory authority, coupled with the legislative intent behind the 1965 amendment, requires the conclusion that the legislature intended for criminally usurious loans made to - 14 - - 15 - No. 51 corporate borrowers to be void when a successful usury defense, based on the criminal usury rate, is raised.
The words that state the rule
New York usury law is composed of General Obligations Law §§ 5-501, 5-511, 5- 521; Banking Law § 14-a (1); and Penal Law § 190.40. Together, the statutes establish that loans of less than $250,000 to individuals cannot exceed a 16% annual rate, loans between $250,000 and $2.5 million cannot exceed 25% (the criminal usury rate) and loans of $2.5 million or more are not subject to the usury laws.
The words that state the rule
We conclude that, in assessing whether the interest on a given loan has exceeded the statutory usury cap, the value of the floating-price6 convertible options should be included in the determination of interest. New York law requires that the value of the conversion option, like all other property exchanged in consideration for the loan, should be included in determining the loan’s interest rate for purposes of the usury statutes, to the extent such value, when measured at the time of contracting, can be reasonably determined. The hypothetical possibility that a future exercise of a floating-price conversion option may result in a return exceeding 25% does not render a loan usurious on its face. Rather, the value of such an option is a question of fact, and the burden to prove that value is on the borrower.
The words that state the rule
Following certification of questions by the United States Court of Appeals for the Second Circuit and acceptance of the questions by this Court pursuant to section 500.27 of this Court's Rules of Practice, and after hearing argument by counsel for the parties and consideration of the briefs and the record submitted, certified questions answered in the affirmative. Opinion by Judge Wilson. Chief Judge DiFiore and Judges Rivera, Fahey, Singas and Cannataro concur. Judge Garcia dissents in part in an opinion.
- statuteN.Y. BNK Law § 14-aenactment date not established
The words that state the rule
1. The maximum rate of interest provided for in section 5-501 of the general obligations law shall be sixteen per centum per annum. 2. The rate of interest as so prescribed under this section shall include as interest any and all amounts paid or payable, directly or indirectly, by any person, to or for the account of the lender in consideration for the making of a loan or forbearance as defined by the superintendent pursuant to subdivision three of this section.
- statuteN.Y. BNK Law § 14-aenactment date not established
The words that state the rule
7. Nothing contained in this section nor in any other provision of this act whereunder this section is added to the banking law shall be deemed to prohibit the charging of interest at the rates provided or permitted by United States Public Laws 96-161, 96-221 and 96-399, where applicable.
- statuteN.Y. GOB Law § 5-501enactment date not established
The words that state the rule
4. Except as otherwise provided by law, interest shall not be charged, taken or received on any loan or forbearance at a rate exceeding such rate of interest as may be authorized by law at the time the loan or forbearance is made, whether or not the loan or forbearance is made pursuant to a prior contract or commitment providing for a greater rate of interest, provided, however, that no change in the rate of interest prescribed in section fourteen-a of the banking law shall affect (a) the validity of a loan or forbearance made before the date such rate becomes effective, or (b) the enforceability of such loan or forbearance in accordance with its terms, except that if any loan or forbearance provides for an increase in the rate of interest during the term of such loan or forbearance, the increased rate shall not exceed such rate of interest as may have been authorized by law at the time such loan or forbearance was made.
- statuteN.Y. GOB Law § 5-501enactment date not established
The words that state the rule
4-a. Notwithstanding the provisions of subdivision four of this section, a loan or forbearance repayable on demand may provide for changes, reflecting variations in lending rates, from time to time in the rate of interest payable on such loan or forbearance up to the rate of interest authorized by law at the time of such change and in such case the rate of interest may be so changed in accordance with the terms of the contract or loan commitment relating thereto; provided, however, that the rate of interest charged, taken or received on such a loan or forbearance shall not exceed the rate of interest authorized by law as it may subsequently be reduced from time to time; and further provided, however, that in no event shall such a loan or forbearance by subject to an authorized rate of interest less than that applicable at the time such loan or forbearance was made. The provisions of this subdivision shall apply only to a loan or forbearance repayable on demand which has an initial principal of more than five thousand dollars and which the borrower has the right to repay at any time in whole or in part, together with accrued interest on the principal so repaid, without any penalty.
- statuteN.Y. GOB Law § 5-521enactment date not established
The words that state the rule
2. The provisions of subdivision one of this section shall not apply to a corporation, the principal asset of which shall be the ownership of a one or two family dwelling, where it appears either that the said corporation was organized and created, or that the controlling interest therein was acquired, within a period of six months prior to the execution, by said corporation of a bond or note evidencing indebtedness, and a mortgage creating a lien for said indebtedness on the said one or two family dwelling; provided, that as to any such bond, note or mortgage executed by such a corporation and effective prior to April sixth, nineteen hundred fifty-six, the defense of usury may be interposed only in an action or proceeding instituted for the collection, enforcement or foreclosure of such note, bond or mortgage. Any provision of any contract, or any separate written instrument executed prior to, simultaneously with or within sixty days after the delivery of any moneys to any borrower in connection with such indebtedness, whereby the defense of usury is waived or any such corporation is estopped from asserting it, is hereby declared to be contrary to public policy and absolutely void.
- statuteN.Y. PEN Law § 190.42enactment date not established
The words that state the rule
A person is guilty of criminal usury in the first degree when, not being authorized or permitted by law to do so, he knowingly charges, takes or receives any money or other property as interest on the loan or forbearance of any money or other property, at a rate exceeding twenty-five per centum per annum or the equivalent rate for a longer or shorter period and either the actor had previously been convicted of the crime of criminal usury or of the attempt to commit such crime, or the actor's conduct was part of a scheme or business of making or collecting usurious loans. Criminal usury in the first degree is a class C felony.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.