Somewhere in Queens about six years ago this month, Rosmarie Roopchand lent Raffeek Mohammed $200,000, which Mohammed agreed to repay within two years at a rate of interest of 50 percent per year.
When Mohammed failed to make payment on the loan (his wife allegedly repaid $15,000 of it on his behalf), Roopchand sued Mohammed, his wife and his company. Mohammed asked the court to dismiss the suit on the ground that the loan violated New York law, which limits the amount of interest on loans from one person to another to 16% per year for loans less than $250,000. (Charge someone more than 25 percent per year and you’ve committed a crime.)
The trial judge sided with Mohammed and Roopchand appealed. The appeals court in Brooklyn affirmed the ruling, finding that Roopchand admitted that the interest on the loan was excessive, and an absence of any evidence suggesting that Mohammed agreed to the rate knowing that it might later allow him to avoid repayment.
“A usurious contract is void and relieves the borrower of the obligation to repay principal and interest thereon,” wrote Judge Mark Dillon on behalf of himself and three colleagues. “Indeed, where usury has occurred, ‘the borrower can simply keep the borrowed funds and walk away from the agreement.’” [citations omitted]
Laws that prohibit lending at exorbitant rates of interest date to England in the 15th century and aim to protect “desperately poor people from the consequences of their own desperation,” New York’s Court of Appeals explained in 1977.
By law, a borrower whose loan a court determines to be usurious “can simply keep the borrowed funds and walk away from the agreement,” Chief Judge Judith Kaye wrote on behalf of the court in a 1992 ruling.
Still, the penalty depends on the lender and the amount of the loan. Banks forfeit the interest but not the principal. Corporations cannot allege usury to avoid repaying a loan. Loans between $250,000 and $2.5 million are subject to the prohibition on criminal usury but exempt from the 16% cap. (Loans that exceed $2.5 million are exempt from all usury caps.) Merchants who lend to each other as part of a transaction are exempt from usury laws, so long as the interest does not exceed eight percentage points above the prime rate.