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What New Jersey Private/Hard Money Lenders Need to Know About Usury

Posted March 3, 2020Adam S. Kessler, Esq.Publications

New Jersey’s usury statutes set a ceiling on permissible interest rates.  In New Jersey there are two separate types of usury, civil usury and criminal usury.

Civil Usury

Civil usury is governed by N.J.S.A. 31:1-1, et seq.

The maximum legal rate in New Jersey is 6% per annum on loans not evidenced by a writing and 16% per annum if there is a written contract specifying a rate of interest. N.J.S.A. 31:1-1(a).   

Loans that are secured by a first lien on residential real estate are governed by a higher rate of interest determined by the Commissioner of Banking.  The Commissioner may establish a different usury rate for loans secured by properties containing one to six units where a portion of the property is used for non-residential purposes. N.J.S.A. 31:1-1(b).  

Exceptions to New Jersey Civil Usury

The statue exempts loans of $50,000.00 or more, except for loans secured by a first lien on real property containing one to six units where a portion of the property is used for non-residential purposes. N.J.S.A. 31:1-1(e)(1).

Most important to private and hard money lenders, all loans to corporations, limited liability companies and limited liability partnerships are exempt from New Jersey’s civil usury statute.  Such borrowing entities cannot plead the defense of usury in civil matters. N.J.S.A. 31:1-6.  When loans are made to corporations, the defense of usury is also not available to the individual who personally guarantees the corporate obligation.  See Selengut v. Ferrara, 203 N.J. Super. 249 (App. Div. 1985), certif. denied, 102 N.J. 316 (1985).

Criminal Usury

Although there is no reported case law construing the relationship between criminal and civil usury statutes, the criminal statute is understood by New Jersey private and hard money lenders to establish the parameters of usurious lending where a loan is exempt from the civil usury statute.

Criminal usury is governed by N.J.S.A. 2C:21-19.

Criminal usury is defined as interest at a rate of 30% per annum for loans to individuals and 50% per annum for loans to a corporation, limited liability company or limited liability partnership.

Usury as a Borrower Defense

The defense of usury is available to a borrower where the contract rate of interest being charged to a borrower exceeds the maximum rate permitted by law.

Where a disputed interest rate is found to be usurious, the lender will be precluded from recovering any interest, costs or fees in excess of the principal indebtedness of the loan. N.J.S.A. 31:1-3.     

The criminal usury statute outlines different charges for violations.  Criminal usury is a crime of the second degree where the rate of interest on any loan exceeds 50% per annum.  A fine up to $250,000.00 may also apply to any lender who knowingly violates the criminal usury statute.

The Bottom Line

The rule of thumb in New Jersey is that private and hard money lenders should only originate loans where: (1) the borrow is a corporation, limited liability company or limited liability partnership; and (2) the security for the loan is non-owner occupied properties purchased for investment purposes. 

Where the above two rules of thumb are followed, New Jersey private and hard money lenders should be exempt from civil usury restrictions and subject only the criminal usury restriction of 50% per annum.

 

Should you have any questions about originating or enforcing a loan in New Jersey, please reach out to Adam S. Kessler, Esq. by e-mail at akessler@kesslerlaw.com or telephone at (973) 773-1200.  Please also visit our microsite at www.lendinglawyers.com to learn more about our firm’s lending practice.