Usury Clause in Loan Agreement Subject of Recent Michigan Supreme Court Case

A recent Michigan Supreme Court case may have limited the validity of usury clauses in loan agreements.

What is a usury clause?

Michigan, like many other states, has usury clause statutes that limit the interest charged in lending transactions to 25 percent. In addition to imposing that limit, usury clauses typically state that lenders who exceed the limit will apply extra interest paid toward the principal or provide a refund to the borrower.

The case of Soaring Pine Capital Real Estate and Debt Fund v Park Street Group Realty Services

The Michigan Supreme Court case of Soaring Pine Capital Real Estate and Debt Fund II LLC v Park Street Group Realty Services LLC will likely influence usury savings clauses in the future. In the case, Soaring Pine issued a loan of $1 million to Park Street in order to “flip” houses in Detroit. The loan had a rate of 20 percent and included a $50,000 up-front fee, a $1,000 per house “success fee,” and other charges.

At the start of the loan, the borrower paid the principal and interest. However, after paying more than $140,000 in interest on the loan, Park Street stopped paying, alleging Soaring Pine violated the usury statute. Soaring Pine counter-sued, claiming the charges were for loan fees and not interest.

A trial court agreed with Park Street in that the expenses and fees tied with the loan were disguised interest, and that Soaring Pine charged a usurious interest rate. However, the court also agreed with Soaring Pine in its assertion that the usury savings clause was enforceable. In the end, the court decided that Park Street should be relieved of its obligation to pay the interest, but not the principal. The case was appealed to the Michigan Supreme Court which upheld the decision of the lower court.

What does this case mean for lenders?

Due to the results of the Soaring Pine case, lenders may be unable in many cases to rely on usury savings clauses to avoid penalties for usurious interest rates. Lenders may wish to check the details of their loans and may want to restructure their contracts to avoid imposing usurious rates.

Help is available

The banking and business attorneys at O’Reilly Rancilio are available to answer your questions on the law. To learn more, please call 586-726-1000 or visit our website.