Real Estate C
Resume:
State of New Jersey
NJLRC
New Jersey Law Revision Commission
FINAL REPORT
relating to
INTEREST AND USURY
MARCH 1998
NEW JERSEY LAW REVISION COMMISSION
*** ****** ******, *** **., Box 47016
Newark, New Jersey 07101
(Fax) 648-3123
email: abqfwa@r.postjobfree.com
web site: http://www.lawrev.state.nj.us
TABLE OF CONTENTS
INTRODUCTION 2
RECOMMENDATION 4
LEGAL ANALYSIS 4
The New Jersey Interest and Usury Statute
4
Exceptions to Usury Rate Contained in Other New Jersey Law
6
Federal Law 8
Necessary Conforming Amendments
9
CONCLUSION 10
RECOMMENDED REVISIONS TO NEW JERSEY STATUTES
11
1. Recommended Amendment to Title 2C of the Code of Criminal Justice
11
2. Recommended Amendment of Title I. Acts, Laws and Statutes
13
3. Recommended New Section
14
4. Recommended Conforming Amendments
14
5. Recommended Repeals 35
.
c:\rpts\usury.doc
1
INTRODUCTION
The current New Jersey usury statute is based on the 1877 Revised statutes.1 In
the 19th century, the maximum permitted interest rate on a loan of money was 6%, a rate
that today would have the effect of terminating the credit business in New Jersey. Later,
the statute was amended to establish two rates: (1) 6% per year on an oral contract to lend
money or any thing of value, and (2) 16% per year if the contract is written and the
contract specifies the interest rate.2 The statute itself contains several exceptions to the
two base rates.3 The most important exceptions are the ones for first lien mortgages for
4
residential property, and for other loans exceeding $50,000.
Though the statute appears to establish a simple and workable system of regulating
interest rates, this is not the case. Changes in the banking industry have required New
Jersey to exempt large categories of loans from the usury statute. Federal deregulation of
banking and federal preemption of state usury laws for first lien residential mortgages have
weakened the New Jersey usury statute.5 The usury statute does not apply to national
banks doing business in New Jersey, further limiting the statute s jurisdiction.
Consequently, the usury statute is not a comprehensive statement of the regulation of
interest rates in New Jersey. Its main effect on New Jersey law is to obfuscate the rules
setting lawful interest rates and thereby to impose an unnecessary information cost on the
credit industry.
There are four categories of loans that the usury statute does not cover. First,
purchases under revolving credit accounts, installment loan purchases and purchases under
credit card accounts are exempted from the usury statute under what is called the time-
price differential doctrine.6 This doctrine creates the legal fiction that the extension of
1
Rev. 1877, p. 519, 1, as am. By L.1878, c.26, 1, p.30 [C.S. p. 5704, 1].
2
N.J.S.A. 31:1-1.
3
E.g., N.J.S.A. 31:1-1(b).
4
N.J.S.A. 31:1-1(b); N.J.S.A. 31:1-1(e).
5
See discussion ofFederal Law infra at 9.
6
E.g., Steffenauer v. Mytelka & Rose, Inc., 87 N.J. Super. 506 (App. Div. 1965)(finding
that installment sale contract containing finance charge did not constitute a loan bearing interest
but reflected a time price differential).
c:\rpts\usury.doc
2
credit is not a loan of money but an adjustment in price for the privilege of delaying
payment. Consequently, an enormous class of sales finance transactions, some carrying
interest rates that can exceed 20% per year, do not even come within the jurisdiction of
the statute. Second, national banks may charge the interest rate allowed to the state s
most favored lender.7 A national bank hence may lend money to a New Jersey resident in
complete disregard of the usury statute and set the highest permitted rate allowable in
New Jersey for its most favored lender. In New Jersey, credit unions may lend at any rate
agreed to between the parties.8 Therefore national banks may charge any agreed upon
interest rate.
Third, national and federally insured banks may export the interest rates of the
states in which they are chartered to borrowers located in foreign jurisdictions.9 For
example, a bank located in North Dakota can charge interest to a New Jersey borrower at
North Dakota rates. Fourth, federal law has pre-empted state usury statutes for first lien
residential mortgages. Thus, federally insured banks may charge any interest rate to a
New Jersey home buyer.
The practical collapse of the usury statute proves that it does not work. The
realities of the marketplace and the development of a national credit industry have been
the statute s undoing. The New Jersey Legislature, by enacting so many exceptions to the
statute, has explicitly recognized the difficulty of controlling interest rates at the state
level. The usury statute now is the exception to the general rule that there are no limits on
credit except for those within the criminal usury law. Elimination of usury rates has not
resulted in disaster. This conclusion is evidenced by the residential mortgage business
where market forces, not governmental controls, are responsible for the relatively low
interest rates enjoyed by borrowers in the 1990 s.
7
E.g., United Bank of Kansas City v. Danforth, 394 F. Supp. 774, 779 (W.D. Mo.
1975)(containing modern statement of most favored lender rule).
8
N.J.S.A. 17:13-104(b).
9
E.g., Marquette National Bank of Minneapolis v. First of Omaha Service Corp., 439
U.S. 299 (1978)(finding that national bank may charge its out-of-state customers higher interest
rates than that allowed by customer s jurisdiction).
c:\rpts\usury.doc
3
The New Jersey usury statute is a throw-back to the days when banking was a
matter of local concern. In the United States, the tradition of local banking was extremely
strong and persistent. National banks were created only after the Civil War, and the
United States did not establish its current central bank until 1911. Under these
conditions, a state could effectively regulate interest rates and protect its borrowers by
usury laws since banks served local communities and made investments tailored to the
needs of its community. However, interest rates now are established mainly at the national
level. Legal barriers to interstate banking have been removed and the legislative trend is
to allow banks to conduct business across state borders. These legal developments have
undercut the importance of New Jersey s usury law and have laid the basis for a
reconsideration of the theory and policy of attempting to control interest rates at the state
level.
RECOMMENDATION
The Commission recommends the repeal of the New Jersey civil usury statute, and
the enactment of a statute giving the Executive limited authority to regulate interest rates
in an emergency. Under the Commission s proposal, the setting of interest rates would be
determined by the market forces of supply and demand for credit. Under limited
circumstances, the Commissioner of Banking and Insurance would have the authority to
promulgate a self-terminating interest rate regulation. The repeal of the civil usury statute
would have no major impact on New Jersey borrowers due to the fact that the current
usury statute affects such a small class of loan agreements. The repeal also would not
disturb regulatory and licensing schemes governing lenders.
LEGAL ANALYSIS
The New Jersey Interest and Usury Statute
The New Jersey usury statute is found at N.J.S.A. 31:1-1 to 31:1-9. Section 31:1-
1(a) establishes two basic legal rates of interest. First, the maximum rate of interest on a
loan of money or other thing of value based on an oral contract is $6 for the forbearance
c:\rpts\usury.doc
4
of $100 in any year, or stated as a simple interest rate, 6% per year. Second, the
maximum rate of interest on a loan of money or other thing of value based on a written
contract specifying a rate of interest is $16 for the forbearance of $100 in any year, or
stated as a simple rate of interest, 16% per year.
The statute contains five exceptions to the basic rate. First, Section 31:1-1(b)
gives the Commissioner of Banking and Insurance authority to establish by regulation
interest rates for first lien mortgages on residential property. This interest rate may not
exceed the Monthly Index of Long Term Government Bond Yields plus 8%. Second,
Section 31:1-1(e)(1) permits the parties to agree on any interest rate related to non-first
lien residential loans the amount of which exceeds $50,000. Third, Section 31:1-1(e)(2)
provides an exception for residential mortgages packaged for sale on the secondary
market to federally established programs. Fourth, Section 31:1-1(g) excepts the basic rate
of interest for certain business and agricultural loans.
Fifth, Section 31:1-1.1 allows New Jersey state banks to charge any rate a national
bank is allowed to charge New Jersey borrowers. This exception was needed to allow
state banks to compete with national banks.10 Under a line of cases beginning with Tiffany
v. National Bank of Missouri, 85 U.S. 409 (1873), the most favored lender doctrine has
allowed national banks systematically to ignore state usury rates. The underlying theory is
that Congress, in enacting the national banking act, intended to prefer national banks over
state banks. In response, the New Jersey legislature enacted the state bank parity act,
which allows state banks to lend money at a rate equal to the rate allowed by Federal law
or regulation to be charged by national banking associations.
N.J.S.A. 17:13B-1 et seq.
The penalty for violating the usury rate limits is found at Section 31:1-3. The
lender forfeits the entire interest and is entitled to recover only the principal of the loan.
The remaining sections of the usury statute deal with a variety of related topics: 31:1-2
(compelling a witness to testify); 31:1-4 (permitting borrower to compel discovery in
10
Note that state bank parity obviates Section 31:1-1(b), the limited exception for first lien
residential mortgages, and that state bank parity is obviated, at least for first lien residential
mortgages, by the federal preemption of state usury laws for residential mortgages.
c:\rpts\usury.doc
5
action based on statutory violation); 31:1-5 (providing special provision for sale of
railroad and canal bonds below par value); 31:1-6 (eliminating defense of usury for
corporations issuing debt obligations); 31:1-7 (exempting subdivisions of government that
raise money in the bond market from the usury statute); 31:1-8 (containing liberal
construction clause); and 31:1-9 (containing statement on effect of 1969 amendment).
Since these sections are unrelated to the question of whether the usury statute should be
repealed, they do not require further discussion.
Exceptions to Usury Rate Contained in Other New Jersey Law
The state of interest rate regulation in New Jersey cannot be derived from an
isolated analysis of the New Jersey usury statute. Reliance on the statute itself is a trap for
the unwary and wary alike. For example, the explicit statement of the statute that it
applies not only to loans of money but to loans of things is misleading in light of the
meaning of the Retail Installment Sales Act (RISA). N.J.S.A. 17:16C-1 et seq. That
statute applies to goods, very broadly defined, purchased on time, that is, at a price
more than the sales price if the goods are paid for at the point of purchase. In economic
terms, the financed purchase price is an interest rate. However, in legal parlance, the
difference between the original purchase price and final financed price is called the time
price differential and does not represent an interest rate. Steffaneur v. Mytelka & Rose,
Inc., 87 N.J. Super 506, 516 (App. Div. 1965). Hence, goods with a purchase price of
$10,000 or less and purchased on credit are subject to RISA but are not subject to the
usury statute. Goods having a value greater than $10,000 are subject to neither law.
The Steffenauer rationale also applies to department store revolving credit card
agreements and to extensions of credit when goods are purchased by bank credit cards.
Sliger v. R. H. Macy & Co., 59 N.J. 465 (1971)(applying time price differential doctrine
to revolving charge account agreements); Sherman v. Citibank (S.D.), N.A., 143 N.J. 35
(1995) (applying provisions of RISA to credit card purchase). The net effect of the time
price differential doctrine to is to move an enormous and important category of credit
c:\rpts\usury.doc
6
purchases out of the sphere of interest rate regulation where, at least in legislative design,
it would have its greatest consumer benefit.
Additionally, the current law leads to the following irrational regulatory result.
The rate of interest lenders may charge on consumer loans $15,000 or less may be set as
high as 30%. The rate of interest lenders may charge on consumer loans ranging between
$15,000 and $50,000 may be set only to a maximum rate of 16%. The rate of interest
lenders may charge on consumer loans exceeding $50,000 may be set as high as 30%.
This division of categories defies logic. In terms of consumer protection, there is no
reason to lift usury protection for consumers borrowing $15,000 or less, while providing
special protections for consumers borrowing in the range between $15,000 to $50,000.
Exceptions to the usury statute further augment the class of loans not subject to
the legal rate of interest. Many statutes explicitly except the application of the usury
statute to extensions of credit. E.g., the Market Rate Consumer Loan Act, N.J.S.A.
17:3B-4 et seq.(allowing lender, as defined in Act, to charge interest on revolving credit
plan at any rate unless prohibited by criminal usury statute); Consumer Small Loan Act,
N.J.S.A. 17:10-1 et seq.(exempting loan of money in the amount of $15,000 or less from
usury rate); Secondary Mortgage Loan Business Act, N.J.S.A. 17:11A-35 et seq.(allowing
lender to make open end-loan to borrower at any agreed upon rate); Licensed Lender
Act, N.J.S.A. 17:11C-1 et seq.(allowing lender and borrower to set rate by agreement for
second mortgage loans and first mortgage loans; and allowing consumer and licensed
lender to set rate by agreement on loans under $15,000); Insurance Premium Financing
Act, N.J.S.A. 16D-1 et seq.(permitting premium finance company to charge any rate of
interest on finance charge agreed to by parties); Banking Act of 1948, N.J.S.A. 17:9A-
59.1(providing for any rate agreed on between bank and customer for overdraft privileges)
and N.J.S.A. 17:9A-59.6(allowing bank to charge agreed on rate for advance loans); and
Revolving Loan Act, N.J.S.A. 17:3B-29 et seq. (allowing bank to charge agreed on rate
for open-end loans).
c:\rpts\usury.doc
7
The exceptions and exemptions to the usury statute have produced a complicated
set of legal rules regulating interest rates. The civil usury statute has in effect become an
exception to the general rule that parties may establish a rate of interest by contract
subject to the limitations of the criminal usury law. While freedom of contract may
comprise the general rule in many cases, the set of legal rules and regulations surrounding
the area of credit is so dense that in some cases lenders and borrowers may be unsure of
the legal status of the credit agreement. The unnecessary multiplication of categories
involving loans and their applicable legal interest rates is illustrated by a list entitled
Current Usury Limitations as of September 22, 1988, prepared by the New Jersey
Department of Banking. It specifies interest limits separately for commercial banks and
savings banks for each of 18 categories of loan. Though the list is dated, it illustrates how
the usury statute has caused an unnecessary level of complication in determining the lawful
rate of interest on any particular loan.
Federal Law
The United States Supreme Court held in Marquette National Bank of Minneapolis
v. First of Omaha Corp., 439 U.S. 299 (1978) that a national bank may charge its out-of-
state customers an interest rate on unpaid credit card balances allowed by its home state
where that rate is greater than that permitted by the state of the bank s non-resident
customers. The United States Supreme Court in Smiley v. Citibank, 517 U.S. 735 (1996)
strengthened that decision. Reaffirming that a national bank may charge out of state credit
card customers interest at the rate allowed by the bank s home state even when that rate is
higher than the rate permitted by the state where the card holder resides, the Court held
11
that the term interest included late payment fees charged by the national bank.
The United States Supreme Court in Tiffany v. National Bank of Missouri, 85 U.S.
409 (1873) held that national banks may charge rates of interest allowed by the states to
11
The Smiley case directly overruled the New Jersey Supreme Court in Sherman v.
Citibank, (S.D.), N.A. 143 N.J. 35 (1995)(holding that South Dakota national bank cannot charge
late fee because under New Jersey law late fee is not interest). By implication, Smiley also
overruled Hunter v. Greenwood Trust, 143 N.J. 97 (1995)(holding that Delaware federally insured
state bank cannot charge late fee because under New Jersey law late fee is not interest).
c:\rpts\usury.doc
8
natural persons generally, and a higher rate, if state banks of issue were authorized to
charge a higher rate. Id. at 413. The case enunciated what is now referred to as the
most favored lender doctrine. The courts have continued to allow national banks to
select the highest rate permitted to lenders generally within the state. Richard E. Brophy,
Jr., State Usury Laws and National Banks, 31 Baylor L. Rev. 169,171 (1979); See, Saul v.
Midlantic Nat. Bank/South, 240 N.J. Super. 62 (App. Div. 1990)(finding that under most
favored lender doctrine Midlantic could charge the rate of interest a New Jersey credit
union could charge, that is, anything agreed to between borrower and lender). The
Comptroller of the Currency has also found that a national bank may charge interest at
the maximum rate permitted by state law to any competing state chartered or licensed
lending institution. Brophy, supra at 173.
In 1980, Congress enacted the Depository Institutions Deregulation and Monetary
Control Act (DIDA). Pub. L. No. 96-221, 94 Stat. 161 (Mar. 31, 1980). This act, in
part, pre-empted state law with regard to first lien residential mortgage loans, whether for
home purchases or other uses, such as first lien home equity loans. The preemption
applies to interest, discount points, finance charges or other charges. While DIDA gave
states a 3 year window in which to override the federal exemption of usury limits, New
Jersey did not exercise that option and no usury rate applies to any first lien residential
mortgage loan executed in New Jersey today by a banking institution or housing
creditor.
Necessary Conforming Amendments
There are two major practical effects of repealing the interest and usury statute.
First, government would have no authority to stabilize the market in an economic crisis.
Second, other statutes, which refer to lawful or legal interest, depend on the interest
and usury statute to determine the meaning of their terms. Without the referent of the
civil usury statute, these statutes would be subject to re-interpretation.
To cope with unusual conditions that cause non-competitive interest rates, the
Commission recommends that the Legislature enact a statute giving the Commissioner of
c:\rpts\usury.doc
9
the Department of Banking and Insurance the authority to promulgate a regulation
controlling interest rates in an emergency. Any regulation promulgated under this power
would expire automatically two years after its effective date to assure that the regulation
does not outlive the emergency to which it responds. This allocation of authority to the
Executive does not create a method to circumvent market interest rates. Its purpose is to
permit government to intercede in the market when the market has demonstrated its
inability to self-correct.
To provide a definition of lawful interest rate, the Commission recommends that
the Legislature enact a statute defining the terms lawful or legal interest. The
Commission s recommended definition is based on the Court Rule interest rate. R. 4:42-
11(a)(ii). That rate is based on the average rate of return received by the New Jersey Cash
Management Fund.
CONCLUSION
In essence, New Jersey s usury statute applies mainly to a limited class of loans:
(1) first lien residential mortgage loans made by persons that are not housing creditors
under federal law, (2) junior lien residential loans made by persons that are not required to
be licensed under the Licensed Lender Act, (3) consumer loans exceeding $15,000 but less
than $50,000, (4) consumer loans made by parties that are not licensed lenders, and (5)
commercial loans under $50,000 that are secured by non-residential real estate or personal
property, or that are unsecured loans.
The New Jersey usury statute can no longer regulate interest rates effectively.
Exceptions to the usury statute, the export of interest rates by out-of-state lenders into
New Jersey, the most favored lender doctrine and federal preemption reduce the benefits
of the New Jersey usury statute. Its principal effect is to create confusion in the credit
area. Attorneys for lenders are faced with the daunting task of determining whether the
rates their clients charge are lawful under the scheme of statutes regulating interest rates.
Given the multiplication of categories and the interaction of federal law, any residual
benefits of the usury law are outweighed by the cost of this wasteful intellectual labor.
c:\rpts\usury.doc
10
The benefits of the repeal are self-evident. Lenders and borrowers alike are
subject only to the two criminal usury rates and thus they are likely to be aware of them.
Second, as a practical matter, the repeal should have absolutely no effect on interest rates.
As already explained, most rates on loans and extensions of credit are not subject to the
civil usury statute. This freedom from regulatory control has not led to the establishment
of punitive interest rates. Rather, the borrowing community has had access to a wider
range of interest rates and lenders.
RECOMMENDED REVISIONS TO NEW JERSEY STATUTES
The repeal of the usury statute would require the Legislature to adopt the
following recommendations of the Commission: (1) a style modification of the New Jersey
criminal usury statute to reflect the repeal of its civil counterpart, (2) a statute authorizing
the Commissioner of Banking and Insurance to regulate interest rates in an emergency, (3)
a statute defining the term lawful interest rate, and (4) technical conforming amendments
to numerous laws that refer to the usury statute.
1. Recommended Amendment to Title 2C of the Code of Criminal Justice
2C:21-19. Wrongful Credit Practices and Related Offenses.
a. Criminal usury. A person is guilty of criminal usury when not being authorized
or permitted by law to do so, he:
(1) lends money or other property to a natural person at an interest rate exceeding
30% per year, or,
(2) lends money or other property to a business entity with limited liability at an
interest rate exceeding 50% per year.
The phrase lends money or other property includes: (1) making a loan directly or
indirectly, (2) agreeing to lend money or other property, (3) taking money or other
property as interest on a loan or (4) agreeing to take money or other property as interest
on a loan.
[(1) Loans or agrees to loan, directly or indirectly, any money or other property[ at
a rate exceeding the maximum rate permitted by law; or
c:\rpts\usury.doc
11
(2) Takes, agrees to take, or receives any money or other property as interest on
the loan or on the forbearance of any money or other interest] in excess of the maximum
rate permitted by law.
For the purposes of this section and notwithstanding any law of this State which
permits as a maximum interest rate a rate or rates agreed to by the parties of the
transaction, any loan or forbearance with an interest rate which exceeds 30% per annum
shall not be a rate authorized or permitted by law, except if the loan or forbearance is
made to a corporation any rate not in excess of 50% per annum shall be a rate authorized
or permitted by law.]
Criminal usury is a crime of the second degree if the rate of interest on any loan
made to any person exceeds 50% per annum or the equivalent rate for a longer or shorter
period. It is a crime of the third degree if the interest rate on any loan made to any person
except a corporation does not exceed 50% per annum but the amount of the loan or
forbearance exceeds $1,000.00. Otherwise, making a loan to any person in violation of
subsection a.(1) and a.(2) of this section is a disorderly persons offense.
b. Business of criminal usury. Any person who knowingly engages in the business
of making loans or forbearances in violation of subsection a. of this section is guilty of a
crime of the second degree and, notwithstanding the provisions of N.J.S.A. 2C:43-3, shall
be subject to a fine of not more than $250,000.00 and any other appropriate disposition
authorized by N.J.S.A. 2C:43-2b.
c. Possession of usurious loan records. A person is guilty of a crime of the third
degree when, with knowledge of the nature thereof, he possesses any writing, paper
instrument or article used to record criminally usurious transactions prohibited by
subsection a. of this section.
d. Unlawful collection practices. A person is guilty of a disorderly persons offense
when, with purpose to enforce a claim or judgment for money or property, he sends, mails
or delivers to another person a notice, document or other instrument which has no judicial
or official sanction and which in its format or appearance simulates a summons, complaint,
court order or process or an insignia, seal or printed form of a federal, State or local
government or an instrumentality thereof, or is otherwise calculated to induce a belief that
such notice, document or instrument has a judicial or official sanction.
e. Making a false statement of credit terms. A person is guilty of a disorderly
persons offense when he understates or fails to state the interest rate, or makes a false or
inaccurate or incomplete statement of any other credit terms.
f. Debt adjusters. Any person who shall act or offer to act as a debt adjuster shall
be guilty of a crime of the fourth degree.
"Debt adjuster" means a person who either (1) acts or offers to act for a
consideration as an intermediary between a debtor and his creditors for the purpose of
settling, compounding, or otherwise altering the terms of payment of any debts of the
debtor, or (2) who, to that end, receives money or other property from the debtor, or on
behalf of the debtor, for payment to, or distribution among, the creditors of the debtor.
c:\rpts\usury.doc
12
"Debtor" means an individual or two or more individuals who are jointly and severally, or
jointly or severally indebted.
The following persons shall not be deemed debt adjusters for the purposes of this
section: an attorney at law of this State who is not principally engaged as a debt adjuster; a
nonprofit social service or consumer credit counseling agency licensed pursuant to P.L.
1979, c. 16 (C. 17:16G-1 et seq.); a person who is a regular, full-time employee of a
debtor, and who acts as an adjuster of his employer's debts; a person acting pursuant to
any order or judgment of court, or pursuant to authority conferred by any law of this State
or of the United States; a person who is a creditor of the debtor, or an agent of one or
more creditors of the debtor, and whose services in adjusting the debtor's debts are
rendered without cost to the debtor; or a person who, at the request of the debtor,
arranges for or makes a loan to the debtor, and who, at the authorization of the debtor,
acts as an adjuster of the debtor's debts in the disbursement of the proceeds of the loan,
without compensation for the services rendered in adjusting such debts.
Comment
This amendment is necessitated by the repeal of the civil usury statute, N.J.S.A. 31:1-1 et seq. It
establishes a criminal rate of 30% for natural persons and 50% for corporations unless other law, such as
DIDA, is interpreted to permit the charging of interest at a rate greater than the rates stated in the
criminal statute.
2. Recommended Amendment of Title I. Acts, Laws and Statutes
[New Section] Definition of lawful interest rate
The terms lawful interest, legal interest, or any equivalent term, means the
annual rate of interest equal to the average rate of return, to the nearest whole or one-half
percent, for the corresponding preceding fiscal year terminating June 30 of the New Jersey
Cash Management Fund (State accounts) as reported by the Division of Investment in the
Department of the Treasury.
Comment
This statute is necessitated by the repeal of the civil usury statute, N.J.S.A. 31:1-1 et seq. The
terms lawful or legal interest rate, which appear in several statutes, depend the civil usury statute for
their meaning, generally understood to mean the 6% civil usury rate. The repeal of the civil usury statute
has the potential to call into question the meaning of the terms lawful or legal interest. Hence, this
statute provides a meaning for these terms based on the standard used in New Jersey Court Rule 4:42-
11(a)(ii).
c:\rpts\usury.doc
13
3. Recommended New Section
[New section] Regulation of interest rates
If the Commissioner of the Department of Banking and Insurance finds that there
is a market dislocation that restricts the public s access to credit, the Commissioner may
adopt a regulation limiting the rate of interest charged by lenders. The Commissioner shall
not regulate interest rates unless the benefit of the regulation outweighs any negative
impact of the rate on the operation of the free market. The regulation shall expire twenty
four months after the date it is adopted unless sooner repealed by the Commissioner.
Comment
This statute replaces the civil usury statute, N.J.S.A. 31:1-1 et seq. Its purpose is to give the
Commissioner of Banking and Insurance authority to set a maximum interest rate in cases of emergency.
The term market dislocation means that the ordinary forces of supply and demand for credit no longer
operate to set the price of money. Increases in the cost of credit alone are inadequate to meet this
standard. Rather, to use this authority, the Commissioner must make two findings based on reliable
evidence. First, the Commissioner must find that the market has lost its capacity for self-correction.
Second, the Commissioner must find that the benefit of regulation outweighs the harm of state
intervention in the marketplace. The premise of the statute is that this emergency authority will rarely, if
ever, be exercised. To make certain that this emergency authority is not abused, any regulation
promulgated hereunder expires automatically twenty four months after its adoption.
4. Recommended Conforming Amendments
12A:10-104. Statutes saved from repeal.
The following statutes and parts of statutes and all amendments thereof are hereby
specifically saved from repeal and shall remain effective as provided in section 12A:9-203:
Uniform Act for Simplification of Fiduciary Security Transfers
1959 laws, chapter 200 (14:18-1 through 14:18-12),
The Banking Act of 1948
1948 laws, chapter 67, 54 (17:9A-54), 55 (17:9A-55), 59 (17:9A-59),
Small Loan Law
R.S. 17:10-1 through R.S. 17:10-26, 1958 laws, chapter 107 supplementing the
same,
Provident Loan Associations
R.S. 17:11-1 through R.S. 17:11-12, 1953 laws, chapter 353 (17:11-13 through
17:11-18),
Savings and Loan Act
c:\rpts\usury.doc
14
1946 laws, chapter 56, 78 (17:12A-78), 79 (17:12A-79),
(Deleted by amendment, P.L. [1984], c. [171]),
Safe Deposit Companies Law
R.S. 17:14-1 throughR.S. 17:14-8,
Investment Companies Law
1938 laws, chapter 322, 1 through 20 (17:16A-1 through 17:16A-20),
Retail Installment Sales Act of 1960
1960 laws, chapter 40 (17:16C-1 through 17:16C-61),
Home Repair Financing Act
1960 laws, chapter 41 (17:16C-62 through 17:16C-94),
[Usury Law
R.S. 31:1-1 throughR.S. 31:1-6,]
Assignment or Purchase of Wages Law
R.S. 34:11-25, R.S. 34:11-26,
Motor Vehicle Certificate of Ownership Law
R.S. 39:10-1 throughR.S. 39:10-25,
Pawnbrokers and Dealers in Secondhand Goods Law
R.S. 45:22-1 through R.S. 45:22-34, 1939 laws, chapter 55, 1 through 7
(45:22-35 through 45:22-41),
Chattel Mortgages Included in Realty Mortgages
R.S. 46:28-10, R.S. 46:28-14,
Bridge Companies Law
R.S. 48:5-18,
Railroads Law
R.S. 48:12-18,
Street Railways Law
R.S. 48:15-15.
L. 1961, c. 120. Amended. L. 1962, c. 203, L. 1967, c. 146, L. 1984, c. 171.
17:2-6. General powers.
Savings banks, banks, banking institutions, trust companies, building and loan
associations, savings and loan associations, mortgage companies and insurance companies
organized under any general or special law of this State, all boards, commissions and
c:\rpts\usury.doc
15
departments of the State Government and of the various counties and municipalities
thereof, and executors, administrators, trustees, guardians and other fiduciaries are
authorized:
a. To make such real estate mortgage loans as may be guaranteed or insured in
whole or in part by the United States of America or the State of New Jersey, or by any
officer, agency or instrumentality of either of them, or for which a commitment to so
guarantee or insure has been made, and to invest in, purchase or otherwise acquire, own
or hold, mortgage notes or bonds so guaranteed or insured;
b. To cause such mortgage securities to be and be kept so guaranteed or insured
and to pay for and receive the benefits of such guarantees or insurance;
c. To invest in, purchase or otherwise acquire, own and hold notes, bonds,
debentures, capital stock or other such obligations of any national mortgage association;
provided, the issuance of such notes, bonds, debentures, capital stock or other such
obligations has been approved by the Federal Housing Administrator. Nothing in sections
17:2-5 to 17:2-8 of this Title contained shall be construed to empower any fiduciary to
make any investment or commitment in capital stock pursuant to paragraph "c" of this
section;
d. To make loans for the purpose of financing the purchase of or refinancing an
existing ownership interest in certificates of stock or other evidence of an ownership
interest in, and a proprietary lease from, a corporation or partnership formed for the
purpose of cooperative ownership of real estate in this State.
Such institutions may, subject to such regulations as the commissioner finds
necessary and proper, invest to an amount not exceeding 85% per annum of the purchase
price or, in the case of a refinancing, the appraised value of certificates of stock or other
evidence of an ownership interest in and a proprietary lease from, a corporation or
partnership formed for the purpose of the cooperative ownership of real estate within the
State, for the purpose of financing a purchase of or refinancing an existing ownership
interest in such a corporation or partnership, provided (1) such investment is secured
within 90 days from the making of the loan by an assignment or transfer of the stock or
other evidence of an ownership interest of the borrower and a proprietary lease; and (2)
repayment of principal and interest shall be effected within 30 years. [Notwithstanding any
other provision of law, the maximum rate of interest which may be charged, taken or
received upon any loan or forbearance made pursuant to this subsection may exceed by no
more than 1 1/2% per annum the rate of interest prescribed by the commissioner which is
applicable to mortgage loans on one-to-six family dwellings a portion of which may be
used for commercial purposes, pursuant to the provisions of 31:1-1 et seq.]
R.S.
Amended. L. 1938, c. 52; L. 1968, c. 33; L. 1977, c. 94.
17:3B-7. Interest.
[Notwithstanding the provisions of R.S. 31:1-1, a] A lender may, subject to the
criminal usury provisions of N.J.S.A. 2C:21-19, charge and collect interest under a
revolving credit plan on outstanding unpaid indebtedness in the borrower's account under
c:\rpts\usury.doc
16
the plan at daily, weekly, monthly, annual or other periodic percentage rates as the
agreement governing the plan provides or as established in the manner provided in the
agreement governing the plan. If the applicable periodic percentage rate under the
agreement governing the plan is other than daily, interest may be calculated on an amount
not in excess of the average of outstanding unpaid indebtedness for the applicable billing
period, determined by dividing the total of the amounts of outstanding unpaid
indebtedness for each day in the applicable billing period by the number of days in the
billing period. If the applicable periodic percentage rate under the agreement governing
the plan is monthly, a billing period shall be deemed to be a month or monthly if the last
day of each billing period is on the same day of each month or does not vary by more than
four days therefrom.
Nothing in this section shall be construed to authorize the charging of interest on
the amount of any accrued interest remaining unpaid on the account.
L. 1985, c. 81.
17:3B-17. Interest.
[Notwithstanding the provisions of R.S. 31:1-1, a] A lender extending closed end
credit may, subject to the criminal usury provisions of N.J.S.A. 2C:21-19, charge and
collect interest with respect to a note or loan at daily, weekly, monthly, annual or other
periodic percentage rates established in accordance with the terms of the loan agreement,
except that the interest shall be calculated on a simple interest basis. In no instance shall
the precomputed interest method be used. Nothing in this section shall be construed to
authorize the charging of interest on any accrued interest remaining unpaid on the
account.
For purposes of this section, a year may be, but need not be, a calendar year and
shall be a period of 365 days. "Precomputed interest" means an amount equal to the whole
amount of interest payable on a loan for the period from the making of the loan to the date
scheduled by the terms of the loan for the repayment of the loan in full.
L. 1985, c. 81.
17:9A-53. Scope of article; definitions; interest.
A. In addition to such other loans which banks are authorized to make, a bank may
make secured and unsecured installment loans upon the terms and conditions prescribed
by this article, but this article shall not be construed as prescribing an exclusive method for
the making of loans which are payable in installments.
B. As used in this article:
(1) "Bank" means a banking institution as defined in section 1 (C. 17:9A-1) of this
act;
(2) "Installment loan" means a loan (1) which is required by its terms to be repaid
in two or more installments; (2) upon which interest is contracted for at a rate in excess of
c:\rpts\usury.doc
17
that authorized pursuant to R.S. 31:1-1; (3) the amount of which does not exceed the
amounts authorized by subsection D. of section 54 of this act (C. 17:9A-54D); and (4) the
final installment of which is payable not more than 12 years and 3 months subsequent to
the date upon which such loan is made. The terms "installment loan" and "installment
loans" as used in this article include both precomputed and nonprecomputed installment
loans unless otherwise expressly stated;
(3) (Deleted by amendment.)
(4) (Deleted by amendment.)
(5) "Person" means an individual, a partnership and an association;
(6) (Deleted by amendment.)
(7) (Deleted by amendment.)
(8) (Deleted by amendment.)
(9) "Actuarial method" means the method of applying payments made on a loan
between principal and interest pursuant to which a payment is applied first to accumulated
interest on the principal amount of the loan and the remainder is applied to the unpaid
principal balance of the loan in reduction thereof;
(10) "Precomputed interest" means an amount equal to the whole amount of
interest payable on an installment loan for the period from the making of the loan to the
date scheduled by the terms of the loan for the payment of the final installment;
(11) "Precomputed loan" means an installment loan which is evidenced by a note
the face amount of which consists of the aggregate of the principal amount of the loan so
evidenced, and theprecomputed interest thereon;
(12) "Nonprecomputed loan" means an installment loan which is evidenced by a
note the face amount of which consists solely of the principal amount of the loan so
evidenced;
(13) "Unpaid balance" of an installment loan means the aggregate of the following:
(i) The face amount of the note evidencing such loan;
(ii) All amounts paid by the bank and added to such loan as provided in paragraph
(2) of subsection A of section 55 [17:9A-55];
(iii) All interest accrued and unpaid;
(iv) Such further charges as the bank may make pursuant to law in protecting or
enforcing a security interest in any property securing the payment of such loan or
otherwise;
(v) In the case of precomputed loans, the amount of all late charges imposed
pursuant to section 55;
less the aggregate of the following:
(vi) All installment payments made in the case of a precomputed loan, or all
payments made in reduction of principal in the case ofnonprecomputed loan;
a
c:\rpts\usury.doc
18
(vii) All payments made on account of or in payment in full of any charges or
amounts referred to in subparagraphs (ii), (iii), (iv) and (v) of this paragraph (13); and
(viii) In the case of a precomputed loan, the amount of the credit to which the
borrower is entitled pursuant to section 56 [17:9A-56];
(14) "Class I installment loan" means an installment loan which is unsecured, and
also means an installment loan which is secured by an interest in tangible or intangible
personal property;
(15) "Class II installment loan" means an installment loan which is secured by an
interest in real property.
C. [Notwithstanding the provisions of R.S. 31:1-1 or any other law to the
contrary, a] A bank may contract for and receive interest on installment loans calculated
according to the actuarial method, at a rate or rates agreed to by the bank and the
borrower. This subsection shall not limit or restrict the manner of contracting for the
interest charge, whether by way of add-on, discount or otherwise [, so long as the interest
rate does not exceed that permitted by this subsection]. In the case of a precomputed loan,
the interest may be computed on the assumption that all scheduled payments will be made
when due, and all scheduled installment payments made on a precomputed loan may be
applied as if they were received on their scheduled due dates. In the case of
nonprecomputed loans, all installment payments shall be applied no later than the next day,
other than a public holiday, after the date of receipt, and a day shall be counted as one
three-hundred-sixty-fifth of a year.
D. (Deleted by amendment.)
E. (Deleted by amendment.)
F. (Deleted by amendment.)
G. The commissioner may prepare and distribute to such banks as shall make a
request therefor, a schedule or schedules to be used in ascertaining precomputed interest,
or he may approve a subsisting schedule or schedules, and interest taken pursuant to such
c:\rpts\usury.doc
19
schedule or schedules shall constitute a complete compliance with this section. A copy of
such schedule or schedules, certified by the commissioner, shall be evidence in all courts
and places.
L. 1948, c. 67. Amended. L. 1950, c. 311; L. 1959, c. 180; L. 1965, c. 171; L.
1968, c. 436; L. 1973, c. 228; L. 1976, c. 128; L. 1981, c. 103.
17:9A-53.4. Educational loans.
[Notwithstanding the provisions of R.S. 31:1-1 or any other law to the contrary, a]
A banking institution may make educational loans and may charge and collect interest
thereon at a rate or rates agreed to by the banking institution and the borrower. Interest
shall be calculated according to the actuarial method, pursuant to which payments made
on the loan are applied first to accumulated interest on the principal amount of the loan
and the remainder applied to the unpaid principal balance of the loan in reduction thereof.
All payments shall be applied no later than the next day, other than a Sunday or a public
holiday, after the date of receipt, and a day shall be counted as one three-hundred-sixty-
fifth of a year. The note or other evidence of the loan may provide for an increase, or may
provide for a decrease, or both, in the rate of interest applicable to the loan. No increase
during the entire loan term shall result in an interest rate of more than 6% per annum over
the rate applicable initially, nor shall the rate be raised more than 3% per annum during
any 12-month period. The lender shall not be obligated to decrease the interest rate more
than 6% over the term of the loan, nor more than 3% per annum during any 12-month
period. If a rate increase is applied to the loan, the lender shall also be obligated to adopt
and implement uniform standards for decreasing the rate. If the note provides for the
possibility of an increase or decrease, or both, in the rate, that fact shall be clearly
described in plain language, in at least 8-point bold face type on the face of the note. No
rate increase shall take effect during the first 3 years of the term of the loan, or thereafter,
(a) unless at least 90 days prior to the effective date of the first such increase, or 30 days
prior to the effective date of any subsequent increase, a written notice has been mailed or
delivered to the borrower that clearly and conspicuously describes such increase, and (b)
unless at least 365 days have elapsed without any increase in the rate. No increase during
the entire loan term shall result in an interest rate of more than 6% per annum over the
rate applicable initially, nor shall the rate be raised more than 3% per annum during any
12-month period.
L. 1975, c. 287. Amended. L. 1981, c. 103.
17:9A-58. Exempt transactions.
Nothing in this article applies to
(1) any loan or extension of credit which a bank may make pursuant to any other
law of this State or any regulation promulgated pursuant to such law, nor does this article
apply to any loan or other extension of credit otherwise authorized or not prohibited by
law, or otherwise enforceable at law; or
c:\rpts\usury.doc
20
(2) [any loan which bears interest at a rate not in excess of a rate authorized
pursuant to R.S. 31:1-1 computed upon its unpaid balances; or eleted by amendment
]d
(3) any instrument or obligation, lawful upon its face, which is purchased or
discounted by a bank pursuant to paragraph (1) of section 25 [17:9A-25], and which
represents, evidences, or secures an existing indebtedness having its inception in a
transaction to which the bank is not a party; regardless whether such instrument or
obligation is acquired by the bank with or without rights of recourse against the person
from whom the bank obtains such instrument through such purchase or discount. A bank
shall not be deemed to be a party to a transaction within the meaning of this paragraph,
because prior to the inception of rights in any instrument, obligation or indebtedness
purchased or discounted by it, the bank approves the credit of any person liable for the
payment of such instrument, obligation or indebtedness at the request of the person who
supplies the consideration which supports the liability of any person to pay such
instrument, obligation or indebtedness.
L. 1948, c. 67. Amended. L. 1950, c. 311; L. 1968, c. 436; L. 1976, c. 128.
17:9A-59.6. Advance loan interest rates; annual fees.
A. [Notwithstanding the provisions of R.S. 31:1-1 or any other law to the
contrary, the] The rate or rates on advance loans shall be as agreed to by the bank and the
borrower. [Interest may be reckoned according to any method authorized by 31:1-1.]
R.S.
The contract may provide that the interest rate may be increased, or may be
decreased, or both, from time to time; provided, however, that no increase in interest shall
be effective unless: (a) at least 90 days prior to the effective date of the first such increase,
or 30 days prior to the effective date of any subsequent increase, a written notice has been
mailed or delivered to the borrower that clearly and conspicuously describes such change
and the indebtedness to which it applies and states that the incurrence by the borrower or
another person authorized by him of any further indebtedness under the plan to which the
agreement relates on or after the effective date of the increase specified in the notice shall
constitute acceptance of the increase and (b) either the borrower agrees in writing to the
increase or the borrower or another person authorized by him incurs such further
indebtedness on or after the effective date of the increase stated in the notice. The
provisions of this paragraph permitting an increase in a rate of interest shall not apply in
the case of an agreement which expressly prohibits changing of interest rates or which
provides limitations on changing of interest rates which are more restrictive than the
requirements of this paragraph. If the contract provides for the possibility of an increase or
decrease, or both, in the rate, that fact shall be clearly described in plain language, in at
least 8-point bold face type on the face of the contract.
B. For the purposes of this section, charges for premiums advanced by the bank
for credit life insurance, or credit accident and health insurance, or both, shall be treated as
part of the principal balance owing on an advance loan, but no such charge shall be
included in determining the maximum permissible indebtedness as limited by section 11 of
this act [17:9A-59.11].
c:\rpts\usury.doc
21
C. Notwithstanding the provisions of any other law to the contrary, a bank which
issues a credit card in connection with an advance loan contract in effect between the bank
and the borrower as authorized by this act [17:9A-59.1 et seq.] may charge the borrower a
fee not exceeding $15.00 per annum on an annual or monthly basis; except that, if under
the advance loan contract, the bank may lend the borrower an amount of $5,000.00 or
more, the bank may charge the borrower a fee not exceeding $50.00 per annum on an
annual or monthly basis. The charge so made (1) may be collected in advance, (2) shall be
in addition to and not in substitution of any other fee or charge authorized by this act, and
(3) shall not be deemed to be an interest charge.
L. 1959, c. 91. Amended. L. 1968, c. 64; L. 1981, c. 37; L. 1981, c. 103; L. 1984,
c. 225.
17:9A-59.27. Small business loans.
(a) [Notwithstanding the provisions of R.S. 31:1-1 or any other law to the
contrary, a] A bank may contract for and receive interest on a small business loan
calculated according to the actuarial method, at a rate or rates agreed on by the bank and
the borrower. This subsection shall not limit or restrict the manner of contracting for the
interest charge, whether by way of add-on, discount or otherwise[, so long as such charge
does not exceed the limitation imposed by this section]. In the case of a precomputed loan,
the interest charge may be computed on the assumption that all scheduled payments will
be made when due, and all scheduled installment payments made on a precomputed loan
may be applied as if they were received on their scheduled due dates. In the case of
nonprecomputed loans, all installment payments shall be applied no later than the next day,
other than a public holiday, after the date of receipt, and a day shall be counted as one
three-hundred-sixty-fifth of a year.
(b) (Deleted by amendment.)
L. 1964, c. 162. Amended. L. 1968, c. 36; L. 1972, c. 119; L. 1979, c. 319; L.
1981, c. 103.
17:9A-59.40. Loan to depositor in amount of and guaranteed by deposit.
Notwithstanding any other provision of law, a banking institution may contract
with a depositor for the loan of money in an amount not to exceed such depositor's
deposit and secured by a pledge of such deposit, upon such terms and conditions as may
be mutually agreed upon between the banking institution and such depositor[; provided,
however, that the rate of interest charged with respect to any such loan shall not exceed
the maximum permitted under the provisions of R.S. 31:1-1 or 2% in excess of the interest
rate then paid with respect to the deposit which secures such loan whichever is greater
].
L. 1977, c. 64.
c:\rpts\usury.doc
22
17:11C-5. Exemptions from licensing.
a. Depository institutions and insurance companies are exempt from licensing as
secondary mortgage lenders; but subsidiaries and service corporations of these institutions
or companies shall not be exempt.
b. A real estate broker or salesperson licensed in New Jersey pursuant to
R.S.45:15-1 et seq. is not required to obtain a license to negotiate a secondary mortgage
loan in the normal course of business as a real estate broker or salesman.
c. An attorney authorized to practice law in New Jersey is not required to obtain a
license to negotiate a secondary mortgage loan in the normal course of business as an
attorney.
d. Any person who makes one or two secondary mortgage loans in this State
during any calendar year [which are at an interest rate which is not in excess of the usury
rate in existence at the time the loan is made, as established in accordance with the law of
this State, and] on which the borrower has not agreed to pay, directly or indirectly, any
charge, cost, expense or any fee whatsoever, other than that interest, shall not be required
to obtain a license under this act.
e. Any employer who provides secondary mortgage loans to his employees as a
benefit of employment which are at an interest rate which is not in excess of the usury rate
Contact this candidate