Letter Regarding Permissible Interest Rates

Model Letter

This is a model letter. Adapt to fit your facts and circumstances.

DATE

Re:

Dear :

Enclosed herewith please find copies of the relevant statutes relating to the permissible rates of interest which may be charged. I thought it would be helpful for you to have actual copies of the statutes to use in determining which rates to charge.

While I do not intend to rehash the statutes, I believe certain points are important. As you will note, Code lists the permissible rates based on the type of debtor. In addition, the permissible rates also vary to some extent based on the amount of the loan. Hence, it is important that you look at both the type of borrower (e.g., individual, corporation, partnership) and the amount which you are financing to ensure that you do not charge a usurious rate.

The basic starting point is that the legal rate on all notes, accounts and contracts is eight percent (8%), calculated on an actuarial method (compound interest), but contracts may be made, in writing, for payment of the finance charge, otherwise, in accordance with the statute. However, Code provides that a borrower may contract for and agree to pay a finance charge which will result in a yield not to exceed the greater of ten percent (10%) per annum or five percent (5%) per annum above the Index of Market Yields of the Monthly 12 Year Constant Maturity Index of Long Term United States Government Bond Yields, as compiled by the United States Treasury Department on any loan, mortgage or advance which is secured by a lien on residential real property. Under the statute, the term "residential real property" means real property upon which there is located or to be located a structure or structures designed in whole or part for residential use. Hence, if you are dealing with borrowers that are repurchasing residential property, you would generally use this subsection to calculate the appropriate rate. However, if it is permissible, based on the type of borrower and the amount loaned, to charge a higher interest under a different subsection, you may charge the rate provided therein not withstanding the fact that you have a lien in real estate.

In those cases where the property being repurchased is raw land, you would generally use the rate provided for in Code if the borrower is an individual, if the amount is under $; or Code if the debtor is a partnership, joint venture or corporation, and the principal balance exceeds $.

Should you have any contracts which are in excess of $, then you are entitled to charge any amount of interest which the parties agree to in writing. You should note, however, that this section is scheduled to be repealed on , although it is likely that the Legislature re-enacted the statute prior to adjourning. I will attempt to determine whether this has in fact occurred, but do not rely on Code after , until we have verified that it has been re-enacted.

A couple of other provisions which may be relevant are Code . The first code section deals with partial payments. Under this section, when partial payments are made, they must be applied first to accrued interest and then to principal unless the parties agree otherwise in writing. The second provision cited deals with late charges. Under this code section, a late payment charge is not to exceed $ or four percent (4%) of the amount of any delinquency, whichever is greater, may be contracted for in writing and will not be deemed a portion of the finance charge. However, under this statute, the late charge cannot be assessed unless the delinquency is more than 15 days past due. Also, the late charge may not be collected more than one time on a specific installment. Where the loan is less than $ and has a maturity of five years or less, late charge cannot exceed $.

I hope that this information and these statutes will be of assistance to you. If after reviewing the statutes, you have any questions or desire to discuss these matters further, please do not hesitate to contact me.

Sincerely,

Encl.