Understanding Michigan Usury Law

Instructor: Peter Hyman

Experience corporate technical writer, trainer, presenter with a Masters in Communications

Usury laws are an important safeguard that protects borrowers and investors from being charged excessive interest rates and finance charges. In this lesson, we'll discuss the laws as it pertains to Real Estate in the State of Michigan.

Financing Troubles

Mike lives in Michigan and just purchased his dream home. As a mortgage was denied from the local bank, the seller offered him financing at 10% per year to complete the purchase! He signed the mortgage, the title was transferred, and the deed was signed and recorded. Mike's making monthly payments and loving his new home! He has gotten his slice of the American Dream.

Then he went on vacation and was late with a payment to the seller. On returning from the holiday, he found a sternly written letter informing him that because he was late with a payment, he was in default on the loan and the seller was going to raise his interest rate from 10% to 25% and charge a penalty of $250 dollars. His dream home has just become a nightmare! He's mad and worried. But then, he wonders, is this legal?

Past Due

Mortgages, Liens, and Real Property

For most people, buying a home is the biggest investment they will ever make. Many do not have the funds to buy the property outright and will likely seek a loan from a bank to purchase the home, called a mortgage. A home buyer, the mortgagor, will give the mortgage to the bank or lender, the mortgagee. The security for the loan is the real property being purchased.

That security is recorded along with the deed as a lien on the property. If the borrower defaults on a loan, any lenders with liens on the property can take action to recover their debts owed including collection actions or even foreclosure - the legal seizure of property due to an unpaid debt.

Michigan Usury Law

Usury laws protect borrowers from unscrupulous lenders and regulate various industry lending practices. Credit cards, mortgages, business loans, and private loans are all governed by usury laws. These laws may also regulate the application of finance charges and penalty fees. However, when it comes to private, unregistered lenders - which would be the case in our example - the law is a bit different. Payday loans, check cashing loans are not covered by Usury laws.

Usury laws in Michigan apply to different types of loans with different caps on permitted interest rates. For example:

  • Mortgages and Land Contracts from a regulated lender have a cap of 25% per year.
  • A conventional first lien by an unregulated lender has a cap of 11% per year.
  • A loan or land contract in excess of $100,000 (excluding residential dwellings) has no ceiling on interest rate.

Other rules apply to junior liens or second mortgages.

  • A regulated bank, 25% per year.
  • A savings bank, 25% per year.
  • An unlicensed person selling a home or a builder, 11% per year.

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