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From Banking and Finance Law Daily, September 26, 2017

Loan’s funding fee was ‘disguised interest’ subject to Alaska’s usury law

By Thomas G. Wolfe, J.D.

A borrower facing foreclosure not only held a viable, timely counterclaim against a personal lender for an alleged violation of Alaska’s usury statute, the borrower also was entitled to recover under the law because the lender’s $4,000 "funding fee" for the loan constituted "disguised interest" and the usury law’s interest cap applied before the loan’s principal balance eventually exceeded $25,000, the Supreme Court of Alaska has decided. In reversing the state trial court’s ruling on the usury counterclaim, Alaska’s high court also determined that the lower court erred in determining that foreclosure sale proceeds did not constitute a payment for purposes of the usury law (Bibi v. Elfrink, Sept. 22, 2017, Stowers, C.).

While the borrower, Mariam Bibi, and her former husband purchased a home in Alaska and obtained mortgage financing through Indy-Mac Bank, F.S.B., secured by two trust deeds, the borrowers later received an additional $10,000 loan from Kevin Elfrink, a real estate broker. According to the court’s opinion, prior to pertinent loan modifications, the Elfrink loan initially charged 10 percent interest along with a "funding fee of $4,000 rolled into the rest of the loan for payment over time rather than charged and paid at the outset." In addition, the Elfrink loan was secured by a third deed of trust on the borrowers’ home and by a security agreement covering the borrowers’ business.

Over the course of six years, the two borrowers "made irregular payments, increased the loan balance three times until it exceeded $25,000, and eventually defaulted." Eventually, Elfrink, and later IndyMac Bank, initiated foreclosure proceedings against the borrowers. For her part, Bibi moved out of the home but filed a counterclaim against Elfrink for usury, quiet title and possession, and surplus proceeds from the foreclosure sale.

Alaska usury law. Alaska’s general usury statute applies to loans of $25,000 or less (Alaska Statutes §45.45.010). A borrower who has paid usurious interest is entitled to recover double the amount of interest paid in excess of the statutory cap (Alaska Statutes §45.45.030). Further, as pointed out by the court, under Alaska case law, a borrower’s total payments must exceed the loan principal plus legal interest before the borrower can recover. Under the applicable statutory formula in place at the time of Elfrink’s initial loan to the borrowers, the maximum allowable interest rate in Alaska was 11.25 percent for loans under $25,000.

Usury counterclaim. In support of her usury counterclaim against Elfrink, Bibi argued that: (1) the original Elfrink loan was usurious because the $4,000 funding fee operated as disguised interest resulting in an interest rate exceeding the statutory cap; (2) the third modification of the Elfrink loan, calling for 12 percent interest, violated the usury statute on its face; (3) the three loan modifications were each separate loans so that every loan was under the $25,000 threshold and subject to Alaska’s interest cap; and (4) in connection with escrow payments made on the loan and the proceeds derived from Elfrink’s foreclosure sale, Bibi paid the principal amount plus interest—both usurious and legal—on each loan, and "at least one of these payments—the foreclosure sale proceeds—was within the statute of limitations."

Court’s rulings. While stating it did not agree with all the borrower’s arguments in support of her usury counterclaim, the Alaska Supreme Court determined that: (1) it was error to conclude that Bibi lacked standing to bring her usury claim; (2) it was error to conclude that the funding fee was not disguised interest; (3) the trial court correctly decided that the Alaska usury statute’s cap on interest did not apply to most of the loan period, but the statute did apply before the loan’s balance exceeded $25,000; (4) a borrower must make payments that exceed a usurious loan’s "principal plus lawful interest" before recovering under the usury statute; (5) it was error to conclude that foreclosure sale proceeds could not constitute a payment for purposes of the usury statute; (6) in light of the foreclosure sale, it was error to conclude that Bibi’s usury claim was barred by the applicable statute of limitations; and (7) Bibi was entitled to recover double the amount of usurious interest she paid.

In rejecting the trial court’s finding that the $4,000 funding fee was an acceptable "service fee" and not interest, the court ultimately determined that the funding fee constituted "disguised interest." The court emphasized that the trial court failed to consider two germane factual questions: (i) whether the funding fee was "a one-time charge or assessed throughout the life of the loan;" and (ii) "whether the funding fee was unreasonably large." Since both considerations weighed in favor of the funding fee being disguised interest, the court concluded that "Elfrink’s initial loan to Bibi was well above the maximum allowable interest rate of 11.25% at the time; the disguised interest alone was over 37% of the loan’s principal."

Final disposition. In reversing the state trial court’s denial of Bibi’s counterclaim for usury, the Alaska Supreme court remanded the matter for a calculation of Bibi’s usury award, any surplus proceeds, and attorney’s fees and costs. At the same time, the court upheld the lower court’s denial of Bibi’s separate counterclaim for title, possession, and property-related relief.

The case is No. S-15987.

Attorneys: Gail M. Ballou (Law Offices of Gail M. Ballou) for Mariam Bibi. Theodora Accinelli (RCO Legal-Alaska, Inc.) for Kevin Elfrink.

Companies: IndyMac Bank, F.S.B.

MainStory: TopStory AlaskaNews ConsumerCredit InterestUsury Loans Mortgages StateBankingLaws

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