By: Scott J. Kennelly and Susan Novak
Many lending institutions use the 365/360 method of calculating interest on their loans. This method involves applying the ratio of the annual interest over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Many state and federal courts have held the 365/360 method to be acceptable, which may cause lending institutions to dismiss any concerns over usury because (i) use of the 365/360 method is an industry standard, (ii) the 365/360 method is simpler for internal accounting calculation purposes, and (iii) any additional amount charged by virtue of the 365/360 method will be de minimis.
However, a lender should remain cautious when using the 365/360 method in situations where a borrower is already being assessed the maximum interest rate permitted by law, such as where the borrower has defaulted under the loan documents. In these cases, Florida courts, Florida’s Attorney General (by formal opinion), and many federal circuit courts of appeal have found that using the 365/360 method will render the transaction usurious. Under this precedent, the courts reason that the amount of excess interest charged is irrelevant because the usury statutes afford “no leeway.”
Moreover, these authorities have found that assertion by a lender that ease of calculation is justification for exacting higher interest is of “dubious validity” in this age of computer technology, with some courts going so far as to reject the notion that the 365/360 method as a recognized, customary practice.
