The End of Loan Sharking Draws Near In New York

The End Loan Sharking Act: Strengthening New York’s Usury Laws to Protect Small Businesses

In recent years, predatory lending practices have increasingly targeted small businesses in New York, exploiting legal loopholes to impose exorbitant interest rates and hidden fees that cripple their financial stability. To address this growing issue, the New York State Legislature has introduced the End Loan Sharking Act (ELSA), a proposed bill (S1726/A4918) sponsored by Senator Samra Brouk and Assemblymember Steven Raga. This legislation aims to close gaps in New York’s usury laws by expanding protections against predatory financing arrangements and ensuring fair lending practices. However, to fully empower small businesses and deter predatory lenders, ELSA should be strengthened to allow small businesses to sue affirmatively under the criminal usury statute and to explicitly include default interest charges within the scope of usury calculations. These additions would provide robust protections and align New York with the forefront of consumer and business safeguards.

The End Loan Sharking Act: An Overview

The End Loan Sharking Act seeks to modernize New York’s usury laws by addressing loopholes that allow predatory lenders to evade existing regulations. Under current New York law, the civil usury limit is set at 16% per annum, while the criminal usury limit is 25% per annum (General Obligations Law § 5-501; Penal Law § 190.40). Loans exceeding these rates can be deemed usurious, with criminal usury constituting a Class E felony for rates above 25%. However, certain financing arrangements, such as merchant cash advances (MCAs), litigation funding, and rent-to-own contracts, often skirt these limits by claiming they are not traditional “loans” or “forbearances.” These arrangements can impose effective annual percentage rates (APRs) exceeding 100%, trapping small businesses in cycles of debt.

ELSA proposes to amend the General Obligations Law, Banking Law, and Penal Law to extend usury protections to all “financing arrangements,” not just traditional loans. The bill defines interest to include all amounts payable in connection with a financing arrangement, ensuring that hidden fees and charges are factored into usury calculations. It also mandates transparent disclosure of APRs, including fees and tips, and enhances the Attorney General’s authority to regulate predatory practices. By closing these loopholes, ELSA aims to protect small businesses, corporations and consumers from exploitative lending practices that have proliferated, particularly in the fintech sector and through non-traditional lending products like MCAs.

The Case for Affirmative Lawsuits by Small Businesses

One critical limitation in New York’s current usury framework is that corporations, including small businesses, are generally barred from asserting usury as a defense in civil actions, except in cases of criminal usury (General Obligations Law § 5-521). Even then, criminal usury (interest rates exceeding 25%) can only be raised as an affirmative defense to avoid repayment, not as a basis for small businesses to proactively sue lenders for damages or to void usurious contracts. This restriction leaves small businesses vulnerable, as they cannot take the initiative to hold predatory lenders accountable for charging exorbitant rates. The current law seems somewhat inconsistent with our firms landmark Adar Bays case, where New York's highest court held if a transaction violates the usury law in New York, the transaction is void, ab initio, meaning, it never came into existence and a lender cannot seek enforcement of same. (see Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320 (2021). The entire transaction is void, the lender loses both interest and principal, and the courts are commanded to cancel the entire transaction. Businesses should be able to sue to cancel these transactions.

ELSA should be amended to allow small businesses to sue affirmatively under the criminal usury statute (Penal Law § 190.40). Permitting affirmative lawsuits would empower small businesses to seek remedies such as the recovery of usurious interest paid, voiding of predatory contracts, and potential damages for financial harm caused by exploitative lending practices. This change would align with the protections afforded to individual borrowers, who can recover amounts paid above the legal interest rate (General Obligations Law § 5-513). It would also deter lenders from targeting small businesses with high-cost financing arrangements, knowing they could face proactive legal action.

For example, small businesses often rely on MCAs, which can carry effective APRs of 300% or more by structuring payments as “purchases of future receivables” rather than loans. In cases like 110% Effort, 1000% of the Time LLC v. High Roller Rentals LLC (2021), courts have ruled that such arrangements are not loans and thus not subject to usury laws, leaving businesses without recourse. Allowing affirmative lawsuits would enable small businesses to challenge these arrangements in court, proving that the effective interest rate exceeds the 25% criminal usury threshold and seeking restitution for predatory practices. This would level the playing field, giving small businesses the legal tools to fight back against loan sharks masquerading as legitimate financiers.

Including Default Interest Charges in Usury Calculations.

Another critical gap in New York’s usury laws is the treatment of default interest charges—higher interest rates imposed when a borrower misses payments or otherwise defaults on a loan. Currently, default interest rates are often exempt from usury limitations, as about half the courts that decide this issue in New York have held that rates exceeding statutory caps are permissible post-default if specified in the loan agreement (1077 Madison Street, LLC v. March, 2020).

This exemption allows lenders to impose punitive default rates—sometimes much higher than the 25% criminal usury threshold—that can significantly increase the cost of borrowing and push small businesses into financial distress.

ELSA should explicitly include default interest charges in the definition of “interest” for usury calculations. By doing so, the legislation would ensure that the total cost of a financing arrangement, including post-default rates, is subject to the 25% criminal usury cap. This change is particularly important for small businesses, which may face temporary cash flow issues and inadvertently trigger default clauses that escalate interest rates to unsustainable levels. For instance, in American E Group LLC v. Livewire Ergogenics Inc. (2022), the court considered additional fees and charges as part of the interest rate calculation, finding that the effective rate exceeded the criminal usury threshold. Applying this principle to default interest would prevent lenders from using default clauses as a loophole to circumvent usury laws.

Including default interest in usury calculations would also align with ELSA’s goal of transparency. Lenders would be required to disclose the potential impact of default interest rates on the overall APR at the outset of the financing agreement, enabling small businesses to make informed decisions. This provision would deter lenders from embedding predatory default clauses in contracts and ensure that all charges, whether pre- or post-default, are subject to the same regulatory scrutiny.

Broader Implications and Support for ELSA

The proposed enhancements to ELSA—allowing affirmative lawsuits by corporate borrowers and including default interest charges in a usury calculation—would significantly strengthen protections for small businesses. These changes would complement the bill’s existing provisions, such as mandating clear APR disclosures and expanding the Attorney General’s enforcement powers. They would also build on recent efforts by New York Attorney General Letitia James, who has taken action against predatory lenders like DailyPay and MoneyLion for operating as illegal payday lenders (April 2025). By empowering small businesses to take legal action and closing the default interest loophole, ELSA could set a national standard for combating predatory lending.

The urgency of these reforms is underscored by the federal government’s rollback of consumer protections, including the Consumer Financial Protection Bureau’s (CFPB) diminished oversight under recent administrations. This would also include the recent policy shift by the Securities and Exchange Commission to not pursue convertible note funders under federal securities laws, as notes are also securities.

New York must step up to fill these regulatory gaps, as neighboring states have already passed stronger consumer protection laws. The FAIR Business Practices Act (2025), championed by Attorney General James, Senator Leroy Comrie, and Assemblymember Micah Lasher, further highlights the state’s commitment to addressing predatory practices, but ELSA’s targeted focus on usury laws is critical for small businesses facing high-cost financing.

Conclusion

The End Loan Sharking Act represents a vital step toward protecting New York’s small businesses from predatory lending practices, many of these businesses being minority owned. By extending usury laws to all financing arrangements and ensuring transparency in APR disclosures, the bill addresses long-standing loopholes exploited by unscrupulous lenders. However, to maximize its impact, ELSA should allow small businesses to sue affirmatively under the criminal usury statute (as does Massachusetts, Florida and California), giving them the power to hold lenders accountable and recover damages. Additionally, including default interest charges in usury calculations would prevent lenders from using punitive default clauses to evade regulatory limits. These enhancements would empower small businesses, deter predatory lending, and reinforce New York’s role as a leader in consumer and business protection. As the state legislature considers ELSA, these additions will ensure that the law delivers meaningful relief to small businesses struggling under the weight of exploitative financing arrangements.

Mark R. Basile, Esq. is the Senior Attorney at The Basile Law Firm P.C. Mark can be reached at mark@thebasilelawfirm.com. To learn more about what we can do for you, please call us today at 516.455.1500 ext. 110 to request your free initial consultation. With offices in New York, Texas and Florida, we serve wronged private and public companies nationwide.