Usury Law in Minnesota

By John Bedosky and Dan Schleck

Minnesota has enacted legislation that provides for a tight regulation of personal and consumer loans. In this regard, when it comes to a personal loan made in the State of Minnesota, the usury limit is set at 8%. Individuals and some types of corporations are prohibited from extending a loan to an individual consumer that has an interest rate provision requiring payment of interest at a rate that exceeds 8% per annum. As noted, this represents one of the more restrictive usury limitations that have been implemented by any state in the U.S.

There are other statutory schemes in place in Minnesota that govern the interest rates of other types of financing situations. For example, there is a statutory code that governs the interest rates that can be charged permissibly by banks, savings and loans, and credit unions that have been duly chartered within the State of Minnesota. (It is important to note that in recent years state chartered financial institutions are declining in number. With interstate banking laws now on the books in many jurisdictions, the benefits of state chartered financial institutions have been on the decrease.

The statutory provisions that govern usury and personal loans in Minnesota can be found codified at Minnesota Statutes and Session Laws at Chapters 44A and 45. I have attached a copy of the statute for your reference. As has been noted, other statutory provisions relating to different types of loans and lending practices are codified elsewhere within the Minnesota statutory scheme.

As stated above, the general rule is that interest charged on a written contract for the loan or forbearance of money, goods or things in action may not exceed 8%. 1 If interest is charged in excess of the maximum, the debtor may recover the full amount of interest paid plus costs, if the action is brought within 2 years after payment.2 Except for residential mortgage loans, there is no limitation on the rate or amount of interest on a loan or advance made under a written contract, signed by the debtor, for $100,000 or more (including any written extension or modification). 3

If the principal amount of the indebtedness is less than $100,000, or if there is a binding commitment to extend credit of less than $100,000, and the loan is made for business or agricultural purposes, the lender may not charge more than 4.5% in excess of the discount rate5 The term "business" means a commercial or industrial enterprise which is carried on for the purpose of active or passive investment or profit. For such loans, if interest in due in excess of the maximum, then the excess is forfeited. Alternatively, if interest has been paid, the borrower may recover twice the amount actually paid, if an action is commenced to recover it within 2 years after it was paid.

Thus, if the borrower is an individual who uses the loan for personal, family, or household purposes and not business or agricultural purposes, and the amount of the obligation is less than $100,000, and there is no time price contract6 or open end account,7 and the lender isnot secured by a mortgage on residential real estate, the maximum interest rate is 8 percent per year.8

Certain usurious contracts are void and the lender is not entitled to accrued interest or principal.9 This provision does appear to apply to loans of less than $100,000 made for agricultural or business purposes which charge more than the maximum permitted (4.5% in excess of Federal Reserve Discount Rate),10 though the statutory language is not absolutely clear.

Even if it were to apply, it is unclear whether the borrower may not only refrain from repaying the debt but also recover the amounts of principal or interest previously paid.

In Rathbun v. W.T. Grant Co.11, a class-action lawsuit involving usurious retail sales installment contracts, the Minnesota Supreme Court determined “that the recovery of both interest and principal provide[d] a remedy too harsh under the circumstances.”12 Therefore, the Minnesota Supreme Court permitted the plaintiffs to recover interest only.13 Other courts have held that Minnesota law gives usury victims two remedies:  return of all interest paid and cancellation of the contract as void. Cancellation of the contract as void means that the lender forfeits the principal, too.

Conclusion

The Usury laws in Minnesota are complicated. Generally speaking your are not allowed to charge interest in excess of the limits set in Minn. Stat. 334.01, et. al. If contemplating a transaction that might involve unusually high interest rates it is best to consult with any attorney .

John Bedosky is an attorney with Minneapolis Bankruptcy Lawyer and works with small to medium sized business to protect their assets, plan for the future and assure the success of the business.

Dan Schleck is the president and founder of Schleck & Associates. He also works with business, banks and individuals to protect their rights and help his clients succeed in business.

1 Minn. Stat. §334.01, Subd 1. Loans not evidenced by a writing are subject to a maximum interest rate of 6%. 2 Minn. Stat. §334.02. 3 Minn. Stat. §334.01, Subd 2. 4 Currently, the rate is 0.75%, which means that the maximum interest rate under this section is 5.25%. 5 Minn. Stat. §334.011.

6 Seller of property may demand higher price if payments are to be made over time. Applies to credit unions, industrial loan and thrifts and sales to small business licensees under Minn. Stat. § §52.04, 53.04 and 56.132. 7 Retail sales contracts under Minn. Stat. §334.016 or open-end loan account arrangements with banks, under Minn. Stat. §48.185.

8 Minn. Stat. §334.01, subd. 1. 9 Minn. Stat. §334.03. 10 Barton v. Moore, 558 N.W.2d 746 (Minn. 1977). 10 Barton v. Moore, 558 N.W.2d 746 (Minn. 1977). 11 300 Minn. 223, 219 N.W.2d 641 (1974). 12 219 N.W.2d at 653. 13 See id. See also Katz & Lange, Ltd. v. Beugen, 356 N.W.2d 733, 735 (Minn.Ct.App.1984) (“Although the interest rate . was usurious, [the] counterclaim seeking to have the entire underlying debt declared void is too harsh under the circumstances. [Cite to Rathbun.] Forfeiture of all the charges is a sufficient remedy.”

(emphasis added));  Kudzia v. Weise, No. C7-93-1906, 1994 WL 233599 (Minn.Ct.App. May 31, 1994) (unpublished) (citing Rathbun and Beugen). 14 See, e.g., Fogie v. Thorn Americas, Inc., 190 F.3d 889 (8th Cir. 1999).

This content is not meant to constitute advice of any kind, including without limitation, legal advice of any kind. If you require advice in relation to any legal matter you should consult an appropriately qualified lawyer.

Should I Choose Bankruptcy?