Challenges to Address in the Anticipated Rise in Foreclosures
The third quarter of 2021 saw the largest quarterly percentage increase of foreclosures since 2014. Lenders started the foreclosure process on 25,209 properties and repossessed 7,574. That trend can be seen locally too. We have witnessed an increase in foreclosure filings in Miami-Dade County. For instance, one third of all foreclosures filings in 2021 have taken place in August and September alone. And more filings are anticipated as many of the COVID related forbearance agreements expire.
With the rise in foreclosures comes the potential rise of usury claims being asserted against lenders, and private lenders in particular. Usury refers to the practice of charging too much interest on a loan. A borrower asserting that a loan was usurious is a defense that is often asserted in foreclosures especially in the context of private loans or hard money loans.
Florida’s usury laws are codified in Fla. Stat. Chap. 687. That section provides that 18% is the maximum rate of interest that can be charged on loans less than $500,000. On the other hand, 25% can be charged on loans more than $500,000. It is a criminal offense to charge interest more than 25%, and interest rates higher than 45% are punishable as a felony in Florida. If the loan is charging interest in excess of those permitted by Florida law, then the lender may end up paying penalties, or even forfeit the right to collect on the loan.
With the rise in foreclosure filings, and anticipated increase in foreclosures as forbearances expire, we are likely to see many borrowers, especially those with private loans, or hard money loans, assert that they were charged usurious interest rates in violation of Florida law.
In World O World Corporation v. Patino, 306 So.3d 1044 (Fla. 3d 2020), the Third District Court of Appeal concluded that a non-usurious loan does not become usurious when a written demand for usurious interest is made.
In that case, the lender, World O World Corporation, sued its borrower, Patino, because the borrower had failed to make payments under the note and mortgage. At trial evidence was presented that the lender had made a usurious demand for payment. The trial court agreed that the demand for payment was usurious and dismissed the lawsuit. The lender appealed that dismissal.
On appeal, the Third District Court of Appeal reversed the trial court. In so doing, the appellate court observed that the underlying note provided for a legal and permissible rate of interest. Therefore, the loan was not usurious at its inception and the terms of the loan did not violate Florida’s usury laws.
The appellate court went on to explain that “it is well settled that the determination of whether a transaction is either civilly or criminally usurious is made at the inception of the loan.” Put a different way, the usurious nature of the contract depends on what may be demanded of the borrower under the terms of the signed contract and note as opposed to what is actually demanded from him. The appellate court then reasoned that “a holding that a mere demand for usurious interest unjustified by any contractual requirement to pay it, render the loan usurious, would mean, for example, that an utterly baseless claim for 17% interest upon a simple note which plainly provides for only 9% would invalidate the transaction itself.” The court concluded that this “cannot be and is not the law.”
What is telling from this case is the extent borrowers will go to try and potentially invalidate a loan on usurious grounds. The defense assertion was predicated on a demand letter requesting the borrower to pay the amounts due and owing. Unfortunately, the demand letter wrongfully calculated the interest that was due and owing. While the trial court agreed with the argument that the usurious interest contained in the demand letter could wipe out the loan, the appellate court reversed the trial court and concluded that such a result “cannot be and is not the law” in Florida. Feel free to contact our office should you wish to discuss Florida’s usury laws further and evaluate your potential loan.