Usury

Usury — usury statutes vary significantly from state to state, with some setting specific numerical caps and others providing broader exemptions for certain loan types or federally chartered lenders. A loan that complies with usury limits in one jurisdiction may violate them in another, making the governing law specified in the promissory note an important detail.

For secondary market note investors, usury risk surfaces in several scenarios. A note with a high contract rate or an aggressive default rate may run afoul of the applicable state's limits, particularly if the loan was originated by a private lender outside the federal preemption framework. During due diligence, investors should verify that both the stated interest rate and any default rate provision fall within the legal ceiling for the borrower's state. A usury violation can give the borrower a strong legal defense against collection or foreclosure, undermining the note's value.