Lender's Improper Calculation Of Interest Sinks Foreclosure Action, Leaves It Holding The Bag On A Criminally Usurious Mortgage Loan Subject To Cancellation
(This post is a reprint of an entry originally posted on September 19, 2010.)
A recent court ruling by a Florida appeals court shows how a private mortgage lender, by engaging in certain practices, can find itself unwittingly holding the bag on what a court finds to be a criminally usurious loan that is unenforceable and subject to cancellation. A summary of the facts, adapted from the court's opinion, follow:
- One, Velletri, obtained a loan with a face amount of $250,000 from Providence Mortgage Corporation, which was a mortgage servicing company acting on behalf of Dixon, a private lender. The loan proceeds were to be used to purchase and renovate a commercial property in St. Petersburg.
- The loan was an "interest only" loan, and the loan documents indicated that Velletri would make twenty-three "interest only" payments of $3150 followed by a final balloon payment of $253,150. The stated interest rate of the loan was 15 percent.
- According to the closing documents, Providence withheld $12,500 from the loan proceeds as an "origination fee." It also withheld $513.70 as "interest."
- Further, to ensure that the proposed renovations were actually performed, Providence also withheld an additional $65,000 at closing as "construction loan funds," and it placed those funds into an escrow account from which Velletri could apply for reimbursement as the renovations progressed.
- However, despite the withholding of sums totaling $78,013.70 from the loan proceeds at closing, the $3150 "interest only" payment was calculated based on a 15 percent interest rate on the full $250,000 face amount of the loan.
- Providence assigned the note and mortgage to Dixon at closing.
- Ultimately, Velletri defaulted on the loan and Dixon filed his foreclosure action against the property.
- Velletri defended against the foreclosure action by raising the defense of usury. Velletri contended that the loan was criminally usurious from its inception and that therefore the note and mortgage were unenforceable.
- Dixon argued that the loan was not usurious because he had not received the funds withheld at closing and because he had no usurious intent.
- The Florida appeals court ultimately determined that, as a result of the lender charging interest on the entire face amount of the loan, without any abatement to reflect the withheld loan proceeds, the recalculated interest pushed the actual rate charged to over 25%, which under Florida law, constitutes criminally usurious interest, the remedy for which is cancellation of the debt itself and a return of any loan repayments made by the
See Velletri v. Dixon, 44 So.3d 187 (Fla. 2d DCA, 2010) for the ruling, along with the actual number-crunching involved in the determination that the interest charged on this loan exceeded the maximum amount (25%) allowed on this type of loan under Florida
- Sections 687.03, 687.04, and 687.071 provide statutory causes of action which allow a borrower to seek affirmative relief against a lender who has made a usurious loan.
- Civil usury involves loans of $500,000 or less with an interest rate greater than 18 percent and less than 25 percent.
See § 687.03(1).
- Criminal usury involves any loan amount with an interest rate greater than 25 percent.
See § 687.071(2).
- The penalties for civil usury include forfeiture of double the interest actually charged and collected. See § 687.04. The civil penalty for criminal usury is significantly greater: forfeiture of the right to collect the debt at all.
See § 687.071(7).
- Whether a transaction is either civilly or criminally usurious is determined at the inception of the loan. See Home Credit Co. v. Brown, 148 So. 2d 257, 259 (Fla. 1962); Oregrund Ltd. P'ship v. Sheive, 873 So. 2d 451, 458-59 (Fla. 5th DCA 2004).
- If a borrower is required to pay a bonus or other consideration at the inception of the loan as an inducement to the lender to make the loan, such an inducement may be considered interest and can render an otherwise proper loan usurious. See Cooper v. Rothman, 57 So. 985, 988 (Fla. 1912); Jersey Palm-Gross, Inc. v. Paper, 639 So. 2d 664, 667 (Fla. 4th DCA 1994), aff'd, 658 So. 2d 531 (Fla. 1995).
- Similarly, if a lender retains a substantial portion of the loan proceeds without allowing a corresponding abatement of interest on the amount retained, that retention effectively increases the interest charged on the amounts actually advanced to the borrower, which can render an otherwise proper loan usurious. See Mindlin v. Davis, 74 So. 2d 789, 793 (Fla. 1954).
- Section 687.03(3) sets forth the methodology to be used to determine whether a loan is usurious when some of the loan proceeds have been retained by the lender at closing. The Florida Supreme Court applied this statutory methodology in St. Petersburg Bank & Trust Co. v. Hamm, 414 So. 2d 1071 (Fla. 1982), and specifically rejected any alternative means of calculating the effective interest rate of a loan.
- [L]oan proceeds retained by the lender are considered additional interest, see Brown v. Home Credit Co., 137 So. 2d 887, 892 (Fla. 2d DCA 1962), and do not reduce the "stated amount of the loan" identified in section
687.03(3), see Hamm, 414 So. 2d at 1073.
- Having determined that the note was criminally usurious at its inception, we must next consider what remedy is proper. Generally, a debt that is criminally usurious at its inception is not enforceable.
See § 687.071(7)("No extension of credit made in violation of any of the provisions of this section shall be an enforceable debt in the courts of this state."); Brown, 137 So. 2d at 892 ("[I]f the interest charged exceeds twenty-five percent per annum the lender shall forfeit the entire indebtedness, both principal and interest.").
- However, Velletri claims she is entitled to more than that. She contends that she should be entitled to both cancellation of the note under section
687.071(7)and an award of double the interest paid under section 687.04—essentially a combination of the remedies for both civil and criminal usury. But such a remedy would be improper.
- When a debt is criminally usurious, the remedy is cancellation of the debt itself and a return of any amounts paid. There is no authority for cumulating the penalties for both civil and criminal usury, and, in fact, the authority is to the contrary. See Rosenbloom v. Hart, 95 So. 2d 18, 19-20 (Fla. 1957) (noting that sections 687.04 and 687.071 recognize and define different degrees of usury and provide distinct and separate penalties which are not cumulative); Brown, 137 So. 2d at 893 (same); Gordon v. W. Fla. Enters. of Pensacola, Inc., 177 So. 2d 859, 862 (Fla. 1st DCA 1965) (same); Coral Gables First Nat'l Bank v. Constructors of Fla., Inc., 119 So. 2d 741, 748-49 (Fla. 3d DCA 1960) (same).
- Contrary to Velletri's assertions, no court has held that the remedies provided in sections 687.04 and
687.071(7)are cumulative of each other. Therefore, we reject Velletri's suggestion that she is entitled to both cancellation of the debt and payment of double the interest she paid. Instead, on remand, the trial court should enter a judgment in favor of Velletri on the foreclosure action and award her a judgment in the amount the evidence establishes that she actually paid Dixon.
Similarly, a foreclosure rescue operator (or anyone else, for that matter) can find itself in violation of the Florida usury statute as a result of a judicial recharacterization when peddling a sale leaseback arrangement that is combined with a repurchase right/option if such a transaction is ultimately recharacterized by a court as a secured loan/equitable mortgage, and where the "profit' on the deal (which would be recharacterized as "loan interest") exceeds the limits under Florida law).
See, for example, Oregrund Ltd. P'ship v. Sheive, 873 So. 2d 451, 458-59 (Fla. 5th DCA 2004), which involved a usury claim in the context of a sale-buyback deal in a civil case. See also Equitable Mortgage & Usury In Sale Buyback Deals In Florida. (Note that, to the extent the sale leaseback transaction falls within the purview of Florida’s Foreclosure Rescue Fraud Prevention Act, F.S. 501.1377(6) thereof creates a rebuttable presumption that the deal is a loan transaction and the deed conveyance from the homeowner to the purchaser (ie. the foreclosure rescue operator, straw buyer, etc.) is an equitable mortgage under F.S. 697.01.)