Fareri v. Ventresca, 49 N.Y.2d 464 (1980)
In determining whether a loan is usurious, courts should apply the traditional method of calculating interest rather than the present value method, even if the latter is arithmetically more precise.
Summary
Fareri v. Ventresca addresses the method of calculating interest to determine usury. The lender used the traditional method, while the borrower argued for the “present value” method, which accounts for the time value of money. The New York Court of Appeals held that the traditional method should be used, emphasizing that the legislature set the usury rate with the understanding that the traditional method would be employed. Changing the calculation method would effectively alter the usury rate, a task best left to the legislature.
Facts
A corporation (Ventresca) borrowed $300,000 from another corporation (Fareri). The loan agreement stipulated a 13% discount ($39,000) retained by the lender and an 8% annual interest rate on the face amount of the mortgage. The borrower was to make twelve monthly installments of $2,000 each, with the principal due at the end of one year. The borrower failed to make the principal payment, and the lender initiated foreclosure proceedings. The borrower defended against the foreclosure by alleging usury, arguing that the effective interest rate exceeded the 25% statutory limit for corporate borrowers.
Procedural History
The trial court (Special Term) granted summary judgment in favor of the lender (Fareri). The Appellate Division affirmed the trial court’s decision, upholding the determination that the loan was not usurious. The borrower (Ventresca) appealed to the New York Court of Appeals.
Issue(s)
Whether, in determining if a loan is usurious, courts should use the traditional method of calculating interest or the more arithmetically precise “present value” method.
Holding
No, because the legislature set the usury rate of 25% with the understanding that the traditional method of interest calculation would be used. Adopting a new method of calculation would effectively change the usury rate, which is a legislative function.
Court’s Reasoning
The court acknowledged that the “present value” method is arithmetically sound and more accurately reflects the realized return for the lender. However, the court emphasized that the issue is not about determining the most precise rate of return but whether the lender received a return proscribed as usurious by the legislature. The court stated: “Modification of either would produce a different point of proscription. In our opinion, the Legislature must be deemed to have set the figure of 25% with full awareness of the traditional method of computing interest and in an expectation that it would continue to be used.” The court cited precedent, including Marvine v. Hymers and International Bank v. Bradley, supporting the traditional method. The court also quoted Feldman v. Kings Highway Sav. Bank, stating, “[S]o long as all payments on account of interest did not aggregate a sum greater than the aggregate of interest that could lawfully have been earned had the debt continued to the earliest maturity date, there would be no usury.” The court concluded that changing the computational method would effectively set a new usury level, a function belonging to the legislature.