Source: https://www.alblawfirm.com/articles/understandinginterest/
Timestamp: 2019-04-22 03:04:44+00:00

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While prohibited in some religious traditions,1 interest is one of the most pervasive concepts in the American economy. Seemingly simple on its surface, it presents a bewildering amount of complexity as soon as one digs into its legal implications. Real Estate practitioners must know the rules of interest when negotiating a mortgage or charging rent to knowing the full monetary stakes of litigation.
CPLR 5001 defines the date which interest is computed as “the earliest ascertainable date the cause of action existed. In cases where damages incurred at various time interest is computed upon each item from the date it was incurred or upon all of the damages from a single reasonable intermediate date.” In cases where there are damages that accrued at different times, such as torts, interest can be computed separately on each segment measured from its own moment of accrual. In selecting the intermediate date, courts have considerable latitude, but if all the amounts at the various dates are roughly equal in amount, courts frequently choose a date that is simply half way between the first and last date the liabilities accrued.
Spodek v. Park Property Development9 had a note calling for monthly payments, each requiring a separate calculation of interest running from each defendant individually. Defendants’ defaults went beyond the six-year statute of limitations. The court allowed the defaults within the six years to be entitled to a CPLR 5001 interest calculation, holding it simple interest. Totaling the sum separately calculated amounts for judgment was not found compounding of interest, but just addition.
New York has three usury statutes: General Obligations Law (GOL) §5–501, Banking Law §§14–a  & 108 and Penal Law §190.40. The GOL and Banking Law sets the maximum interest rate at 16 percent. The Penal Law establishes a rate of 25 percent as a felony. In all cases, the rate is the effective annual rate.
We reject defendant’s contention that the late fee of 2 percent charged by plaintiff was usurious. The late fee was not a loan or forbearance of money and thus the usury statute does not apply.
We also reject plaintiff’s contention that the late fee is usurious under General Obligations Law §5–501(2). The late fee is a penalty for failure to pay a water bill when due. It is designed to insure the prompt payment of water bills and is clearly not a loan or forbearance of money. Where there is no loan, there can be no usury.
Moreover, the late charge provision of the lease, which awarded a 365 percent per annum penalty, should not be enforced. The charge, while not technically interest, is unreasonable and confiscatory in nature and therefore unenforceable when examined in the light of the public policy expressed in Penal Law §190.40, which makes an interest charge of more than 25 percent per annum a criminal offense.
Under 12 U.S.C. § 1735f-7a(a)(1), federal law preempts State usury laws for first mortgages on real property made after March 31, 1980 for federally related mortgage loans.22Wolfert v. Transamerica Home First,23 found New York usury laws preempted under this statute.
The fact that the borrower sets the rate of interest does not relieve the lender from a defense of usury.…In this regard, a borrower, who, because of a fiduciary or other like relationship of trust with the lender, is under a duty to speak and who fails to disclose the illegality of the rate of interest he proposes, is estopped from asserting the defense of usury where the lender rightfully relies upon the borrower in making the loan.
Thus, this latter form of estoppel in pais is limited to relationships where the nature of the relationship is such that at least one of the parties has a background with the other giving rise to a heightened sense of trust, rather than arms’ length.
For example, consider a $100 January first debt at 2 percent/month. Assuming the debt remains unpaid, at simple interest, the accumulated interest is 12 x 2 percent or 24 percent for a payoff of $124.00.
Now, let us use compound interest at 2 percent interest per month. At the end of January, the debt has grown to $102 ($100 + 2 percent of $100). At the end of February, $104.04 ($102 + 2 percent of $102), then March, $106.12 ($104.04 + 2 percent of $104.04). Continuing this pattern through the year, the accumulated debt at the end of December is $126.82. The accumulated interest is $26.82 nearly two points above criminal usury.
While normal judicial awards against a governmental body are, like those against private citizens, simple interest, eminent domain presents a special case. Since the courts are seeking to have the private party put in economically the same situation the private party would have been in but for the taking, 520 East 81st Street Associates v. State of New York,28 awards the takings plaintiff compound interest until the entry of judgment, but simple interest thereafter.
“Late fees” and “interest” are apparently different. But, when basing the fixed fee on lateness of a fixed payment, dividing the former by the latter yields a percentage.
Specifically, the defendant raised triable issues of fact with his contention that the annualized rate of the subject loan was at least 30 percent, in light of the combined annualized rates for interest and the loan origination fee, and that the loan’s interest rate was, thus, in excess of the amount allowed by General Obligations Law §5–501(1) and Banking Law §14–a(1). In determining whether a transaction is usurious, the law looks not to its form, but its substance, or real character.
While on its surface, the concept of “interest” appears to be a simple matter of calculating a percentage of what someone owes, the legal development of interest in New York law shows far greater complexity beneath the surface and far greater importance in understanding the amount of money that can be charged and collected.
*The authors would like to thank Hofstra Law student and Adam Leitman Bailey Spring extern and 2017 summer associate, Carly Clinton, for her research and assistance with the preparation of this article.
As to Judaism, interest is forbidden at Deuteronomy 23:19. Some Christians interpret a similar rule based on Matthew 5:42 combined with the provision from Deuteronomy and other similar provisions. Islam has similar prohibitions in the Quran at 3:130. However, all of these religious provisions have interpreters who say that only usury is prohibited.
Lisa Stifler, “Debt in the Courts: The Scourge of Abusive Debt Collection Litigation and Possible Policy Solutions,” 11 Harv. L. & Pol’y Rev. 91, 112 (2017).
IRB-Brazil Resseguros v. Inepar Investments , 83 AD3d 573 (2011).
FCS Advisors v. Fair Fin. , 605 F.3d 144 (2d Cir. 2010).
Gliklad v. Cherney , 132 AD3d 601 (1st Dept. 2015).
Astoria Fed. Sav. & Loan v. Rambalakos , 49 AD2d 715 (1975).
Citibank v. Liebowitz , 110 AD2d 615 (1985).
Retirement Accounts v. Pacst Realty , 49 AD3d 846 (2d Dept. 2008).
262 AD2d 61 (1st Dept. 1999).
262 AD2d 985 (4th Dept. 1999).
251 AD2d 1060 (4th Dept. 1998).
Bristol Inv. Fund v. Carnegie Int’l. , 310 F. Supp. 2d 556 (SDNY 2003).
273 AD2d 1 [1st Dept. 2000].
142 AD3d 923 (1st Dept. 2016).
See also, Hankin v. Armstrong , 113 Misc2d 24 (AppT 9 & 10 1981).
Tower Funding v. David Berry Realty , 302 AD2d 513 (2003).
439 F.3d 165 (2d Cir. 2006).
Spodek v. Park Prop. Dev. , 96 NY2d 577 (2001).
R.F. Schiffmann v. Baker & Daniels, No. 3072, 2017 WL 535875 (NY App. Div. Feb. 10, 2017).
Feinberg v. Old Vestal Rd. Assocs ., 157 AD2d 1002 (3d Dept. 1990).
78 AD3d 1133 (2d Dept. 2010).

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