## Facts

- A national bank loaned $600,000 to two individuals operating a bowling alley as a partnership to finance construction and operation of the business.
- Because of state lending constraints, the financing was structured as two notes:
  - A $350,000 mortgage note at 7% interest, secured primarily by real estate.
  - A $337,500 installment note that reserved $87,500 as interest in advance (a discount), secured primarily by equipment and secondarily by real estate.
- Michigan law set a 7% ceiling for the relevant loan type; under the National Bank Act, that ceiling governed the bank’s permissible rate.
- The bank also charged $1,595 characterized as closing costs and included a contractual $30,000 prepayment charge.
- The borrowers later formed a corporation, conveyed the real estate to it, and the corporation paid both notes in full.
- The borrowers and the corporation sued under 12 U.S.C. §§ 85–86, seeking the statutory penalty for usury (double the interest), claiming the advance-reserved interest, closing costs, and prepayment charge were interest that exceeded the lawful rate.

## Issues

1. Whether reserving interest in advance on the installment note caused the bank to receive usurious interest under 12 U.S.C. §§ 85–86, using Michigan’s 7% ceiling.
2. Whether the $1,595 closing-cost charge was additional interest for usury purposes.
3. Whether the $30,000 prepayment charge constituted usurious interest.
4. Whether the later-formed corporation’s payoff or ownership altered the debtor-creditor relationship or who could recover under § 86.

## Decision

- The Sixth Circuit affirmed judgment for the bank.
- The advance-reserved interest did not make the transaction usurious under §§ 85–86.
- The closing-cost charge was treated as a legitimate closing expense, not interest.
- The prepayment charge was treated as a contingent charge tied to voluntary prepayment, not interest that rendered the loan usurious.
- The debtor-creditor relationship remained with the original individual/partnership borrowers; no substitution of debtors occurred, and the corporate payoff did not create a separate usury claim.

## Legal Principles

- Under 12 U.S.C. § 85, a national bank may charge interest up to the maximum rate allowed by the law of the state where the bank is located; § 86 provides a double-interest remedy only when the bank knowingly receives more than allowed.
- Interest reserved in advance (discount/advance interest) is not automatically usurious; the question is whether the transaction, as measured under governing standards, yields more than the state-law maximum.
- Reasonable charges tied to bona fide loan closing expenses may be excluded from “interest” in usury calculations when treated as lawful closing costs under applicable state practice.
- A contractual prepayment charge is not necessarily “interest”; when contingent on the borrower’s voluntary prepayment and not used as a device to exact excess interest, it does not alone establish usury.
- For § 86 claims, courts focus on the actual debtor-creditor relationship formed at origination; later transfers of collateral or payment by a related entity do not, by themselves, substitute a new debtor or recharacterize the loan for usury purposes.

## Conclusion

The court held that none of the challenged components of the loan—advance-reserved interest, closing costs, or the prepayment charge—produced a rate above Michigan’s 7% limit as incorporated by the National Bank Act, and it rejected the attempt to alter the usury analysis based on the later corporate conveyance and payoff.


Northway Lanes v. Hackley Union Nat’l Bank & Tr. Co., 464 F.2d 855 (6th Cir. 1972)