Minnesota Usury Law

Usury as a Defense and as a Claim for Recovery

Minnesota’s usury statutes exist as a defense for borrowers being sued on usurious contracts. But Chapter 334 is not defense-only: Minn. Stat. § 334.02 gives a borrower who has already paid usurious interest an affirmative action to recover the full amount paid, with costs, if brought within two years, and Minn. Stat. § 334.011, subd. 2 allows recovery of twice the interest paid on a business or agricultural loan that exceeded the permitted rate. Strickland v. First State Bank of Balaton, 202 N.W. 727, 729 (Minn. 1925), addresses a narrower, common-law point: a borrower who voluntarily pays usurious interest cannot recover it at common law, while one sued on a usurious contract may raise usury as a defense (holding that “[o]ne who voluntarily pays usurious interest may not maintain an action to recover it, while one against whom a usurious contract is sought to be enforced may invoke the statute in his defense”).

As a practical matter, a usury defense is generally only available to a borrower. At common law the doctrine went no further, which is what the Strickland court meant in saying that “[t]he usury statute is a shield but not a sword.” Id. The recovery actions described above come from the statute rather than the common law.

Elements of Usury

To establish a usury claim under Minnesota law, four elements must be present:

1. The loan of money or forbearance of debt,

2. Agreement between parties that principle shall be repayable absolutely,

3. Exaction of greater amount of interest or profit than is allowed by law, and

4. Presence of intention to evade law at the inception of the transaction.

Chapter 334 sets a general 8% usury cap on interest rates. There are many exceptions to this 8% cap. Some of the more notable exceptions are credit organizations, written credit contracts in an amount of $100,000 or more, contracts for the loan or forbearance of money in an amount of less than $100,000 for business or agricultural purposes, interests on verdicts, judgments and awards, and retail installment sales of motor vehicles. For a detailed breakdown of how these limits apply, see Minnesota Usury Law Limits.

Usury Liability

A usurious contract is void, except as to a holder in due course, who may still enforce it; where the original holder sells a usurious note to an innocent purchaser, the maker’s remedy is to recover the principal and interest paid from the original holder. Minn. Stat. § 334.03. Any bond, bill, note, mortgage, or other contract or agreement found void under the chapter is subject to cancellation. Minn. Stat. § 334.05. A lender who operates under a usurious contract can lose interest on the money loaned and can also stand to lose the principle. Minn. Stat. § 334.03 and 334.05. There have been cases, however, that limit recovery to the collection of interest only.

Exceptions for Businesses

No interest rate limit applies to an extension of credit to an organization. The term “organization” includes “a corporation, government, government subdivision or agency, trust, estate, partnership, joint venture, cooperative, limited liability company, or association.” Minn. Stat. § 334.022.

Minnesota Statutes sections 334.022 (no limit for organizations) and 334.011 (interest of up to 4.5 percentage points above the Federal Reserve’s 90-day commercial paper discount rate on business or agricultural loans of less than $100,000) address different questions, the borrower’s organizational status and the loan’s purpose and size, so a permissive rate under § 334.011 does not conflict with the § 334.022 exemption. This issue also arises in rent-to-own contracts and Minnesota’s usury law.

Exceptions

The Minnesota usury statute provides a general ban on high interest rates, but there are exceptions:

• Business and agricultural loans (see Minn. Stat. § 334.011)
• Dealers under Securities Exchange Act (see Minn. Stat. § 334.19)
• Loans secured by savings accounts (see Minn. Stat. § 334.012)
• Mortgage loans (see Minn. Stat. § 47.204)
• Plans under ERISA (Employee Retirement Income Security Act of 1974) (see Minn. Stat. § 334.01)
• State banks/savings associations (see Minn. Stat. § 48.195)
• State credit union (see Minn. Stat. § 52.14)

Credit cards and loans from national banks are not subject to Minnesota usury laws. In Marquette National Bank v. First of Omaha Corp., the Court held that federal law trumps state law and permits a national bank “to charge on any loan” interest at the rate allowed by the laws of the State “where the bank is located.” As a result, Minnesota state usury laws do not apply to national banks located in a state where a higher interest rate is permitted.

When a loan dispute involves more than just interest rates, for example, allegations that a lender tortiously interfered with a borrower’s business relationships, different legal theories may apply. See Tortious Interference Laws in Minnesota for an overview of those claims. Because the exceptions turn on the borrower’s identity and the loan amount, a Minnesota business lawyer can assess whether a specific loan falls within Chapter 334’s limits.