In a decision that will likely have ramifications for lenders and borrowers in the state, the Michigan Supreme Court recently issued a decision clarifying that lenders cannot rely on a “usury savings clause” to circumvent Michigan’s usury statute.  But it also held that a lender’s effort to enforce a usurious loan, by itself, is not enough to trigger criminal liability.

A “usury savings clause” is a term in a contract stating that if a loan’s all-in interest rate is found to be usurious by a court, the borrower will still be required to pay the maximum legal rate.  As the court explained, lenders may include these clauses in contracts because it can be unclear what fees and expenses a court will deem to constitute interest and factor into the interest rate calculation.

The court held that these clauses cannot be enforced if the all-in rate on the underlying loan is usurious.  Enforcing these clauses, the court reasoned, would wrongly encourage lenders to ignore Michigan’s usury statute.  Lenders would be incentivized to lend at the highest rate to which a borrower will agree.  Even if the loan were found usurious, the lender could still recover the maximum interest rate permitted under the law.  That would result in “little downside for a lender who attempts to impose an unlawful interest rate.”  Further, while “Michigan law puts the primary burden on the lender to comply with usury laws when charging interest,” enforcing savings clauses “entirely relieves a lender of that burden and shifts it almost entirely to the borrower.”

Significantly, the court also held that when determining whether a loan is usurious – meaning a savings clause cannot be enforced – courts must look beyond the stated interest rate.  The court found that “it would vitiate the usury laws if courts were to blindly accept the stated interest rate in a note, allowing a lender to smuggle in a usurious rate through fees, charges, and the like.”

But the court also held that a lender seeking to enforce a usurious loan does not violate Michigan’s criminal usury statute.  It concluded that the statutory language did not cover the mere attempt to collect on a usurious loan.  And, it reasoned, imposing criminal liability would “chill both free access to the courts and the ability of attorneys to seek a legal remedy for their clients.”

As the court noted, states take different approaches to the enforcement of usury savings clauses.  Lenders and borrowers should be aware of these differences before entering into transactions.

Photo of Dillon Grimm Dillon Grimm

Dillon Grimm is an associate in the firm’s Washington, DC office, where his practice focuses on complex commercial litigation and class actions.

Dillon has experience in matters involving a range of issues, including consumer protection, breach of contract, and fraud, among others. He…

Dillon Grimm is an associate in the firm’s Washington, DC office, where his practice focuses on complex commercial litigation and class actions.

Dillon has experience in matters involving a range of issues, including consumer protection, breach of contract, and fraud, among others. He has represented clients in the financial services, technology, and sports industries. He also maintains a robust pro bono practice focusing on criminal justice.

Dillon was a judicial law clerk for the Hon. Rebecca Beach Smith, U.S. District Court for the Eastern District of Virginia and the Hon. Jane R. Roth, U.S. Court of Appeals for the Third Circuit, before rejoining the firm in 2021.

Photo of Andrew Soukup Andrew Soukup

Andrew Soukup has a wide-ranging complex litigation practice representing highly regulated businesses in class actions and other high-stakes disputes. He has built a successful record of defending clients from consumer protection claims asserted in class-action lawsuits and other multistate proceedings, many of which…

Andrew Soukup has a wide-ranging complex litigation practice representing highly regulated businesses in class actions and other high-stakes disputes. He has built a successful record of defending clients from consumer protection claims asserted in class-action lawsuits and other multistate proceedings, many of which were defeated through dispositive pre-trial motions.
Andrew is co-chair of the firm’s Class Action Litigation practice group.

Andrew has helped his clients achieve successful outcomes at all stages of litigation, including through trial and appeal. He has helped his clients prevail in litigation against putative class representatives, government agencies, and commercial entities. Representative victories include:

  • Delivered wins in multiple nationwide class actions on behalf of large financial companies related to fees, disclosures, and other banking practices, including the successful defense of numerous lenders accused of violating the Paycheck Protection Program’s implementing laws, which contributed to Covington’s recent recognition as a “Class Action Group Of The Year.”
  • Successfully defending several of the nation’s leading financial institutions in a wide variety of litigation and arbitration proceedings involving alleged violations of RICO, FCRA, TILA, TCPA, FCBA, ECOA, EFTA, FACTA, and state consumer protection and unfair and deceptive acts or practices statutes, as well as claims involving breach of contract, fraud, unjust enrichment, and other torts.
  • Successfully defended several of the nation’s leading companies and brands from claims that they deceptively marketed their products, including claims brought under state consumer protection and unfair deceptive acts or practices statutes.
  • Obtained favorable outcomes for numerous clients in commercial disputes raising contract, fraud, and other business tort claims.

Because many of Andrew’s clients are subject to extensive federal regulation and oversight, Andrew has significant experience successfully invoking federal preemption to defeat litigation.

Andrew also advises clients on their arbitration agreements. He has successfully helped numerous clients avoid multi-district class-action litigation by successfully enforcing the institutions’ arbitration agreements.

Clients praise Andrew for his personal attention to their matters, his responsiveness, and his creative strategies. Based on his “big wins in his class action practice,” Law360 named Mr. Soukup a “Class Action Rising Star.

Prior to practicing law, Andrew worked as a journalist.

Photo of Ashley Simonsen Ashley Simonsen

Ashley Simonsen is a litigator whose practice focuses on defending complex class actions in state and federal courts across the country, with substantive experience in the three hotbeds of class action litigation: New York, San Francisco, and Los Angeles.

Ashley represents clients in…

Ashley Simonsen is a litigator whose practice focuses on defending complex class actions in state and federal courts across the country, with substantive experience in the three hotbeds of class action litigation: New York, San Francisco, and Los Angeles.

Ashley represents clients in the technology, consumer brands, financial services, and sports industries through all stages of litigation, including trial, with a strong track record of success on early dispositive motions. Her practice encompasses advertising, antitrust, product defect, and consumer protection matters. Ashley regularly advises companies on arbitration clauses in consumer agreements and related issues, including mass arbitration risks and issues arising under McGill v. Citibank, N.A. And she is one of the nation’s leading experts on “true lender” issues and the related “valid when made” doctrine.

Photo of Valerie Hletko Valerie Hletko

An accomplished and commercially-minded litigator, Valerie Hletko’s practice has a particular emphasis on financial services regulation and enforcement. She counsels a wide range of financial services industry participants as they navigate dynamic and increasingly interrelated state, federal, and global legal and regulatory challenges.…

An accomplished and commercially-minded litigator, Valerie Hletko’s practice has a particular emphasis on financial services regulation and enforcement. She counsels a wide range of financial services industry participants as they navigate dynamic and increasingly interrelated state, federal, and global legal and regulatory challenges.

Valerie represents clients in complex civil litigation, as well as in investigations and administrative enforcement actions initiated by the U.S. Department of Justice (DOJ), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board (FRB), the Consumer Financial Protection Bureau (CFPB), the Department of Housing and Urban Development (HUD), and state bank regulatory agencies and state Attorneys General. She has assisted clients with pre-enforcement matters relating to a variety of consumer financial products and services, including responding to Proposed Action and Request for Response (PARR) letters, Notice and Opportunity to Respond and Advise (NORA) letters, and managing issues relating to self-disclosure.

Valerie also counsels clients in connection with regulatory examinations and governance and risk management matters implicated by consumer financial laws, including the Fair Credit Reporting Act (FCRA), the Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA), the Fair Debt Collections Practices Act (FDCPA), the Truth in Lending Act (TILA), the federal Servicemembers Civil Relief Act (SCRA) and related state laws, the Military Lending Act (MLA), and prohibitions on unfair, deceptive, or abusive practices in Section 5 of the Federal Trade Commission Act: Unfair or Deceptive Acts or Practices (UDAP) and Section 1036 of the Consumer Financial Protection Act: Unfair, Deceptive, or Abusive Acts or Practices (UDAAP). She further advises clients on a variety of issues that touch the financial services industry, including arbitration and the Americans with Disabilities Act (ADA).

Valerie frequently speaks and publishes on a range of subjects of interest to financial institutions, including fintech, fair and responsible banking practices, specialty finance, and regulatory enforcement trends.