When the In re Moon case ruling first made waves in the California lending industry in 2022, many seasoned lending professionals, from brokers to lawyers, sprang into action to fight against the local California bankruptcy court responsible for the disruptive decision. This ruling provided an incredibly narrow interpretation of California Civil Code Section 1916.1, drastically reducing a lender’s ability to work with a borrower facing default.
Through the efforts of the California Mortgage Association, the American Association of Private Lenders, the National Private Lenders Association, and the Fortra Law (formerly Geraci LLP) team, Senate Bill 1146, a legislative fix, was introduced and signed into law in late 2024.
What were the circumstances that led to the In re Moon ruling and the subsequent SB 1146 solution? Below, we’ll cover the facts of the case and how SB 1146 is shaping the future of California lending.
The Moon Loan Transaction
In June 2015, Mark and Lori Moon borrowed around $759,000 from Milestone Financial LLC for business purposes, secured by their residence. Although they were represented by a real estate broker, the lender did not hold a California real estate broker license under the California Residential Mortgage Lending Act and was not licensed as a loan originator under the California Finance Law. As a result, the DRE issued an order to cease and desist originating mortgage loans until it was properly licensed.
The loan was an interest-only loan at 11.3%, with a loan term of two years, and had a 10% late charge and a default rate of about 17.3%, including late fees. Additionally, if a court found the loan to be usurious, the Note included a savings clause limiting the interest rate to the applicable legal rate of 10%. Both Milestone and the Moons agreed to these provisions. However, in 2016, the Moons requested an extension after failing to make their payments.
The extension extended the loan’s maturity date for two years, increased the principal balance, reduced the interest rate to 11.05%, and increased the default rate. The extension also added a provision that applied the late charge to quote any payment due, including the final balloon payment.
These provisions, like the original loan, were agreed upon and supported in the loan documentation, with clear indications that these were all considered to be reasonable liquidated damages. However, in 2019, the Moons decided they wanted to refinance the loan and requested a payoff statement from Milestone. The total provided from Milestone, which included prepayment penalties and late fees, resulted in 1.2 million dollars. The Moons, unable to finance this amount, sued Milestone Financial LLC, alleging:
- Breach of contract
- Fraud
- Declaratory relief
- Interference with a prospective refinance
In response, Milestone initiated foreclosure proceedings, prompting the Moons to file for Chapter 13 bankruptcy, which they later converted to Chapter 11. The lawsuit was removed from the Bankruptcy Court.
In re Moon and Civil Code Section 1916.1
After mediation efforts failed, both parties sought summary judgment. During this time, the Moons introduced new claims stating that:
- The loan was usurious
- Milestone couldn’t charge both the default interest and a late fee
- The prepayment penalty was unenforceable
The court granted partial summary judgment in favor of the Moons on their prepayment penalty and usury claims, stating that Milestone LLC was in violation of California Civil Code Section 1916.1.
Civil Code Section 1916.1 states “[i]n order for a loan to be arranged by a broker, the broker must act “for compensation or in expectation of compensation for soliciting, negotiating, or arranging the loan for another . . .”
However, the court strictly interpreted the provision related to forbearances, stating that in order for a usury exemption to apply to any loan modification, forbearance, or extension, the modification, forbearance, or extension had to be negotiated by the original purchase broker.
This interpretation was incredibly restrictive, limiting a lender’s ability to work with borrowers facing default.
Legislative Action Through Senate Bill 1146
When the In re Moon ruling created new obstacles for California lenders, industry leaders took immediate action. The result of their advocacy was SB 1146, which took full effect on January 1, 2025. SB 1146 provided a much-requested solution to the problem created by California Civil Code Section 1916.1.
SB 1146 states that any California licensed real estate broker can:
- Negotiate a loan modification or extension
- Facilitate a forbearance agreement.
SB 1146 preserves the usury exemption regardless of broker involvement in the original transaction, restoring much-needed flexibility to lending.
In re Moon and Beyond
The introduction of SB 1146 is a landmark win for private lenders in California. The prevention of technical licensing missteps from blocking reasonable workout solutions provides lenders with more flexibility to assist borrowers without sacrificing the usury exemption. The In re Moon ruling and the swift response from industry leaders emphasize the importance of proactive compliance and legislative action.
At Fortra Law, we are committed to staying up-to-date on major legislative changes that could impact the lending industry and fighting on behalf of lenders in both California and across the country. For the latest updates on legislative news that could impact your business, subscribe to our monthly newsletter. For more information regarding SB 1146 or other compliance concerns, contact our Banking & Finance team today.
