In a decision that will likely have ramifications for lenders and borrowers in the state, the Michigan Supreme Court recently issued a decision clarifying that lenders cannot rely on a “usury savings clause” to circumvent Michigan’s usury statute. But it also held that a lender’s effort to enforce a usurious loan, by itself, is not enough to trigger criminal liability.
A “usury savings clause” is a term in a contract stating that if a loan’s all-in interest rate is found to be usurious by a court, the borrower will still be required to pay the maximum legal rate. As the court explained, lenders may include these clauses in contracts because it can be unclear what fees and expenses a court will deem to constitute interest and factor into the interest rate calculation.
The court held that these clauses cannot be enforced if the all-in rate on the underlying loan is usurious. Enforcing these clauses, the court reasoned, would wrongly encourage lenders to ignore Michigan’s usury statute. Lenders would be incentivized to lend at the highest rate to which a borrower will agree. Even if the loan were found usurious, the lender could still recover the maximum interest rate permitted under the law. That would result in “little downside for a lender who attempts to impose an unlawful interest rate.” Further, while “Michigan law puts the primary burden on the lender to comply with usury laws when charging interest,” enforcing savings clauses “entirely relieves a lender of that burden and shifts it almost entirely to the borrower.”
Significantly, the court also held that when determining whether a loan is usurious – meaning a savings clause cannot be enforced – courts must look beyond the stated interest rate. The court found that “it would vitiate the usury laws if courts were to blindly accept the stated interest rate in a note, allowing a lender to smuggle in a usurious rate through fees, charges, and the like.”
But the court also held that a lender seeking to enforce a usurious loan does not violate Michigan’s criminal usury statute. It concluded that the statutory language did not cover the mere attempt to collect on a usurious loan. And, it reasoned, imposing criminal liability would “chill both free access to the courts and the ability of attorneys to seek a legal remedy for their clients.”
As the court noted, states take different approaches to the enforcement of usury savings clauses. Lenders and borrowers should be aware of these differences before entering into transactions.