Did Phantom “Insurance Fee” Render Interest Rate Usurious?
Craig Frost sought a judgment against Collateral Partners, LLC declaring that a loan agreement between the parties was usurious. Supreme Court granted the motion of CPL for summary judgment declaring that the loan agreement was not usurious. Frost appealed.
In February 2018, Frost obtained a loan from CPL, a licensed collateral loan broker, in the gross sum of $186,000. The loan agreement was reduced to a writing in the form of a pawn ticket. The ticket provided that CPL imposed two fees in the total sum of $5,300, which consisted of an insurance fee in the sum of $2,800 and an “Extra Care” fee in the sum of $2,500, resulting in a net payment to Frost in the sum of $180,700. The ticket also provided that the monthly interest rate was 3.71% of the net amount of the loan, and that Frost was required to make minimum monthly interest payments in the sum of $6,700, commencing in March 2018. In February 2020, Frost defaulted on his loan payments.
“General Obligations Law § 5-501(2) prohibits any person from “charging, taking, or receiving any money as interest on a loan at a rate exceeding the maximum permissible interest rate”. Pursuant to General Business Law § 46, “no collateral loan broker shall ask, demand or receive any greater rate of interest than four per centum per month.”
A usurious contract is void and relieves the borrower of the obligation to repay principal and interest. To determine whether a transaction constitutes a usurious loan, it must be considered in its totality and judged by its real character, rather than by the name, color, or form which the parties have seen fit to give it.
Here, CPL failed to establish, prima facie, that the loan agreement was not usurious. While the ticket showed that CPL imposed an insurance fee in the sum of $2,800, the ticket also indicated that Frost declined insurance coverage. Thus, CPL failed to eliminate triable issues of fact as to whether the purported insurance fee was, in actuality, additional interest on the loan.
And CPL failed to eliminate triable issues of fact as to the duration of the loan agreement, as the ticket listed a “date due” in April 2018, which was approximately a month after the first interest payment was due. Thus, the mere fact that the ticket listed a monthly interest rate of 3.71% was insufficient to establish, prima facie, that the actual monthly interest rate did not exceed the maximum permissible interest rate of 4% per month.
Accordingly, Supreme Court should have denied CPL’s motion for summary judgment declaring that the loan agreement was not usurious,