California usury law is often misunderstood, leading many to believe that lenders can charge any interest rate dictated by the market. The truth is that in the majority of scenarios, a non-exempt lending entity is capped at collecting ten percent annually on a loan, regardless of the borrower’s wishes to pay an elevated interest.
Borrowers and lenders alike need to be cognizant of the potential for usurious loans, as the associated penalties can be severe.
Understanding Usury
The term usury refers to the act of charging interest at a rate over the statutorily mandated maximum. California judicial precedent has defined “interest” to include anything of value received by a lending entity from the borrower, notwithstanding the specific type of consideration, meaning payments submitted via fees, bonuses, commissions, and similar charges could all be considered interest.
California’s usury statute restricts the amount of interest that can be levied on any loan or forbearance. According to California law, non-exempt lenders can place a maximum of ten percent annual interest on money, goods, or things utilized mainly for personal, family, or household purposes.
For other types of loans, including but not limited to home improvement, home buying, and business expenses, non-exempt lenders can charge the greater of ten percent annual interest or five percent plus the Federal Reserve Bank of San Francisco’s discount rate on the 25th day of the month preceding the earlier of the loan’s date of execution. In simpler terms, the rule of thumb is that a non-exempt lender is prohibited from charging more than ten percent annually, barring a pertinent exemption.
For private lenders, this means careful attention must be paid not only to the stated interest rate but also to the total cost of the loan when fees and charges are factored in. Courts in California have historically taken a broad view of what counts as “interest,” so even origination points, processing fees, or exit fees could push a loan into usurious territory.
Consequences of Usurious Loans
Identifying exactly when a California-based loan is usurious can be tricky, given the myriad of legal exemptions scattered throughout multiple federal and state code sections. A loan will generally be considered usurious when the interest rate is higher than the maximum amount set forth by statute. The lender’s knowledge is immaterial, meaning that the plaintiff does not have to prove intent, and ignorance of the law is not a viable defense for defendants.
For example, a borrower could propose and draft a note with a usurious interest rate, and the associated non-exempt lender would still be found liable for collecting on the loan.
Usury claims are clear-cut and thus extremely challenging to mount a defense against, unless, of course, there is an applicable exemption. However, there is the possibility that the lender and borrower mutually agree to adjust a usurious loan or forbearance agreement to make it legally compliant. The California appellate court has ruled that a usurious note can be purged of its usurious terms if both parties to the agreement voluntarily and with full knowledge of the noncompliant format of the original note form a new agreement, and the lender credits the borrower with the amount of excess interest paid in the preexisting exchange.
If a loan is ruled usurious, the originator may face stiff civil penalties. The borrower has several potential cumulative remedies, including: bringing an action for monetary damages for all funds paid over the two years preceding the suit; seeking damages equivalent to three times the interest paid over the course of the twelve months preceding the filing of a claim; seeking a judgment to eliminate all future interest that will come due for the remainder of the loan; and recovering punitive damages if the lender’s behavior is deemed oppressive, fraudulent or malicious.
The impact of this statutory framework is that a usurious loan can potentially transition into an interest-free loan with the added threat of expensive damages and criminal charges. Willfully violating the usury guidelines may also be deemed a violation of Business & Professions Code § 17000, resulting in an additional criminal charge for the guilty party.
For private lenders, the takeaway is clear: the margin for error is razor-thin, and compliance must be built into every loan structure from the outset.
Common Exemptions to California Usury Law
California usury law includes several exemptions that allow certain loans to exceed the standard interest rate caps. Some of the most commonly utilized exemptions include:
- Licensed Lending Entities: Most licensed lending institutions, such as banks, credit unions, and finance companies, are exempt from California’s usury laws.
- Real Estate Secured Loans: Loans secured by real property that are “made or arranged” by a licensed real estate broker may be exempt from California usury law restrictions if the broker’s involvement meets certain criteria.
- Seller Financing: Seller carryback loans, where the seller of real estate finances the purchase for the buyer with a deed of trust secured note, are generally exempt from usury laws.
- Time Payment Agreements and Credit Cards: Under the Unruh Act, financing of consumer goods under a retail installment sales contract and credit card agreements are exempt from usury regulations.
- Licensed Pawnbrokers: Pawnbrokers can charge up to 2.5% monthly interest on loans secured by personal property.
- Loans to Certain Businesses: Loans made to California-based corporate entities with at least $2 million in assets or loans over $300,000 may be exempt if specific conditions are met.
How Fortra Law Can Assist
California’s legal framework means that a seemingly straightforward loan can morph into a catastrophic mess of criminal and civil penalties, regardless of whether the guilty party even intended to violate the law. For private lenders, the complexity of California usury law underscores the importance of structuring loans with exemptions in mind, properly calculating effective interest rates, and staying proactive about compliance.
The Fortra Law Banking & Finance team is well-versed in California usury law, with in-depth knowledge of its regulations and exemptions. Our attorneys help private lenders avoid pitfalls, secure proper licensing, and structure compliant loan agreements to protect profitability and minimize risk. If you’re a private lender navigating California usury law, Fortra Law can provide the guidance you need to lend with confidence.
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