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Usury Savings Clause Cannot Save Lender

In a recent Michigan Supreme Court decision, Soaring Pine Capital Real Estate and Debt Fund II, LLC v Park Street Group Realty Services, LLC, the Court held that a “usury savings clause is ineffective if a note otherwise facially requires the borrower to pay a usurious interest rate, even if the stated interest in the note is not usurious.” 511 Mich 89, 100 (2023).

The note at issue provided for a 20% interest rate, but there were fees and charges associated with the loan that, if considered interest, pushed the effective rate above 25%, Michigan’s criminal usuary threshold. Usury savings clauses are typical provisions in loan agreements that either automatically reduce the interest rate to a non-usurious level or recharacterize usurious interest payments as principal payments.

The Court held that, while usury savings clauses are enforceable in certain circumstances where future events (like an increase in an index rate such as Prime) could push a floating rate loan above the legal limit, it would be against public policy to allow lenders to contract for a facially usurious interest rate and simply rely on a usury savings clause to avoid the consequences of having done so.  Citing public policy that favors judicial intervention, the Court also held that seeking to collect a usurious interest rate in a civil action, standing alone, does not violate the criminal usuary statute. MCL 438.41.  The case was remanded to the trial court for reconsideration consistent with the Court’s opinion.

Wolfson Bolton Kochis PLLC has extensive experience in all aspects of financial transactions, including usury litigation.  Please contact Finance Practice Lead Peter C. Bolton ([email protected]) with any questions.

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