I completely agree with your previous answers. I would just like your additional affirmation since the New York lawyer that I have retained has opined differently. I am aware of the disclaimers concerning your advice. I only want your further comment on this issue so that I can make a rational decision about continuing with this current lawyer.

This is a non-commercial loan between two natural persons. It is secured with a recorded first Mortgage on the borrower's residence. The exact interest rate is 9.798%. Monthly compounding increases the effective rate to approximately 10.34%.
The Note states specifically:

"If the loan is not repaid in full on or before August 20, 2011 then all accrued and unpaid interest together with any unpaid late charges, collection costs and expenses, dishonored check charges and payments made by the Note Holder to enforce this Note and/or protect the Note Holder’s interest under the Mortgage will be added to the principal balance and become the "New Principal Balance". Interest on the New Principal Balance will be the sum of [1] the current 1 month Libor rate plus [2] 9.55%, which shall become the "Post Maturity Default Rate". This rate will be reset at the beginning of each calendar quarter based on the then current 1 month Libor rate. Post Maturity Default Interest will be compounded monthly."
This lawyer has asserted that compound interest is proscribed in NY State based on his reading of §5-527 Subsection (2).
Subsection (1) states that A loan or other agreement providing for compound interest shall be enforceable … etc.
Subsection (2) states 2 exceptions to the enforceability of compound interest: (a) where the loan is for less than $250,000 or (b) the loan is secured by a one or two family owner occupied residence.
The loan in question meets both of these criteria.
Subsection (3) states: “Notwithstanding the provisions of subdivision two of this section, nothing in this section shall effect the maximum rate of interest which may be charged, taken or received as provided by law, or be construed to limit, impair or otherwise affect any loan or other agreement which is, or would be, enforceable without reference to this section … “

I believe that the prohibition of compound interest applies only to cases where the stated annual interest rate is below the maximum allowed of 16%, but where the effect of compounding causes the effective annual interest rate to be greater than the permissible maximum of 16%.

If my lawyer’s interpretation of the law were correct, then a loan that called for an annual interest rate of 1% which was compounded quarterly, creating an effective annual interest rate of approximately 1.004% would be illegal and unenforceable, while a loan that called for 15.999% simple interest annually would be perfectly legal. This interpretation of NY law defies credulity as well as common sense. Notwithstanding that many state and Federal statutes do exactly that, I do not believe that this case constitutes an example of one of them.

My question is this: In New York State is there any set of circumstances whatsoever where the compounding of interest, where such compounding did not cause the effective annual rate to exceed the maximum legal limit of 16%, would nevertheless be proscribed?

Thank you.

Optional Information:
Country relating to Question: United States
State (if USA): New York