The current economic downturn has led to increased public scrutiny of lending practices. Michigan usury laws offer important protection to borrowers by capping the interest rate that lenders can charge. Whether one is a lender or a borrower, it is important to become familiar with the basic law and its many exceptions.
Violation of the usury laws has important consequences for borrowers and lenders alike. First, MCL 438.32 provides that any seller or lender who enters into a contract that charges an interest rate in excess of the maximum allowed by law is barred from the recovery of any interest at all. The lender is also barred from collection charges, attorney fees and court costs. In fact, the borrower or buyer, on the other hand, may recover his or her attorney fees and court costs from the usurious seller or lender. Second, of particular interest to lenders, is Michigan’s criminal usury statute (MCL 438.41) which makes it a crime for any person to charge interest at a rate exceeding 25% per annum.
Michigan’s baseline usury statute, MCL 438.31, states that, “The interest of money shall be at the rate of $5.00 upon $100.00 for a year […],” but allows parties to stipulate in writing to an interest rate up to 7% per year. The law, however, has many exceptions and explicitly states that it “shall not apply to the rate of interest…regulated by any other law of this state, or of the United States….”
For business loans, MCL 438.61 provides that a state or national chartered bank, savings bank, savings and loan association, credit union, insurance carrier, finance subsidiary of a manufacturing corporation, or a related entity may charge any rate of interest if the parties agree in writing, not subject to the normal 25% criminal usury cap.
An individual or company that is not a regulated lender may make business loans with a rate of interest not to exceed the 25% criminal usury cap.
There are three important tips for making sure that your loan documents comply with Michigan usury law: (1) If the borrower is an individual, rather than a corporation, LLC, partnership, or other entity, a sworn business purpose affidavit should be obtained by the lender for the borrower. (2) Since the usury laws are complicated, it is important that the lender check the legal maximum rate for each specific loan transaction. (3) Loan documents should contain a provision that if the interest rate specified in the agreement is higher than that permitted by law, the parties agree that the interest rate will be reduced to the highest rate permitted by law under the circumstances.
For a chart detailing the various interest rate limits in Michigan, click here (PDF).
Very informative post that got right up to the edge of something I’m researching. Is it permissible for a MI corp. to make loans to other corps without being licensed as a finance company or bank? What about MI corp. lending to individuals for business purposes? Does MI corp have to register or license to make these loans?
Thank you for your comment Alan. However, we cannot respond to your specific legal question in this forum. Prior to providing legal advice, Demorest Law Firm must be retained and conduct a check for potential conflicts of interest. If you require legal assistance, please contact our Firm (www.demolaw.com) or another attorney. Thank you for visiting the Detroit Business Law Blog.
Do Late Fees that are in the loan docs equate to interest rates.
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