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Banking Interpretations

March 22, 2000

Dear [ ]:

Your March 13, 2000 letter to the Consumers Services division of the Banking Department, in which you request certain information concerning interest rates, has been referred to me for reply. In brief, you inquire as to the legal rate of interest that a corporation may charge on delinquent accounts owed by both corporate and individual clients.

Generally, Section 5-501 of the General Obligations Law provides that "[t]he rate of interest, upon the loan or forbearance of any money, goods, or things in action…[s]hall be 16% per annum..." This 16% rule is subject to several exceptions. Corporations are prohibited from raising a defense of usury in any action under Section 521(1) of the General Obligations Law, subject to the criminal usury exception contained in Section 5-521(3). Individuals are prohibited from raising a defense of usury for loans and forbearances exceeding (i) $250,000, unless secured by an interest in real property improved by a one or two family residence and (ii) $2,500,000 under Sections 5-501(6)(a) and (b) of the General Obligations Law, respectively. Since you have not provided any details concerning the delinquent amounts in question, we are assuming, for the sake of this discussion, that none of these exceptions are applicable.

However, the 16% rule only applies in cases in which there is intent to lend money, not to a late charge, which the courts of this State have determined does not constitute a loan or forbearance. The courts have reached this conclusion by treating a borrower as if he were in default and view the late charge not as interest, but rather a charge to cover the extra expense incurred by a lender due to a late payment. Thus, a penalty or late fee charged on delinquent accounts may exceed 16% per annum.

Please note, however, that since a late charge is considered liquidated damages it cannot be enforced absent an express or implied agreement providing for its existence. Therefore, a customer must be given notice of the existence of a late charge being imposed prior to incurring the obligation being subjected to the late charge. Further, while the civil usury laws do not apply to late charges, a rate in excess of 25% could be viewed by a court as illegal under the criminal usury prohibition contained in Section 5-521(3) of the General Obligations Law.

I trust that this has been helpful. Please understand that the above advice is not an interpretation of the New York State Banking Law and should be considered to be of an informal nature.

Sincerely,

Assistant Counsel