Velletri v. Dixon
44 So.3d 187 (2010)
Rule of Law:
When a lender withholds a portion of loan proceeds at closing, the effective interest rate is calculated by spreading the withheld amount as a percentage over the loan's term and adding it to the stated interest rate. If this effective rate exceeds the statutory maximum for criminal usury at the inception of the loan, the entire debt is unenforceable.
Facts:
- Susan Velletri obtained a loan with a face amount of $250,000 from Providence Mortgage Corporation, acting on behalf of Thomas W. Dixon, a private lender.
- The loan was for a two-year term with a stated interest rate of 15% to purchase and renovate a commercial property.
- The loan required Velletri to make 23 'interest only' payments of $3,150, calculated based on the full $250,000 face amount of the loan.
- At closing, Providence withheld a total of $78,013.70 from the loan proceeds, which included a $12,500 'origination fee' and $65,000 in 'construction loan funds' placed into an escrow account.
- Despite the withholding of over 30% of the loan funds, Velletri was charged monthly interest on the entire $250,000 principal.
- Providence assigned the note and mortgage to Dixon at closing.
- Velletri made payments for a period but eventually fell behind, leading to the dispute.
Procedural Posture:
- Thomas W. Dixon filed a foreclosure action against Susan Velletri in a Florida trial court.
- Velletri asserted the affirmative defense of criminal usury, claiming the note was unenforceable.
- Following a bench trial, the trial court found the loan to be civilly usurious, but not criminally usurious.
- The trial court entered a final judgment allowing foreclosure but required Dixon to forfeit double the interest collected as a penalty for civil usury.
- Velletri appealed the judgment to the Florida Second District Court of Appeal, arguing the loan was criminally usurious.
- Dixon cross-appealed, arguing the loan was not usurious at all.
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Issue:
Does a loan become criminally usurious and thus unenforceable when a lender withholds a significant portion of the principal at closing for fees and escrow but calculates interest payments based on the full face amount of the loan, causing the effective interest rate to exceed the 25% statutory limit?
Opinions:
Majority - Villanti, Judge
Yes, the loan is criminally usurious and unenforceable. Whether a loan is usurious must be determined at the inception of the transaction, not at a later date. The court applied the mandatory three-step calculation from Florida Statute § 687.03(3) and precedent. First, the withheld amount ($78,013.70) was calculated as a percentage of the total loan ($250,000), resulting in 31.2%. Second, this percentage was spread over the two-year loan term, yielding an annual rate of 15.1%. Third, this rate was added to the stated 15% interest rate, producing an effective rate of 30.1%. Because this rate exceeds the 25% threshold for criminal usury under § 687.071(2), the loan was criminally usurious from its inception. The proper remedy for criminal usury is forfeiture of the entire debt, not the cumulative penalties for both civil and criminal usury. The trial court erred in its calculations and by assessing usury at the time of foreclosure rather than inception.
Analysis:
This decision reaffirms the strict, formulaic approach required by Florida law for determining the effective interest rate when loan proceeds are withheld. It clarifies that the usury analysis is fixed at the loan's inception and is not a moving target. The ruling serves as a significant warning to lenders, especially in construction financing, that charging interest on funds held in escrow and not yet disbursed to the borrower can easily trigger a finding of criminal usury, leading to the complete forfeiture of the debt. This case solidifies the principle that statutory penalties for civil and criminal usury are distinct and cannot be stacked.
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