What is “usury”, and how are you protected from it?
In making of loans to conventional real estate buyers and “flippers”, investors should remember that for most private transactions, California enforces its usury law against excessive interest charges, with certain exemptions for seller carry back loans, and loans “made or arranged” by a licensed broker.
Usury is defined as charging a rate of interest in excess of the legal limit, and for personal, family or household purposes it is 10% per year, and for loans for “any other purpose”, the legal rate is either 10% per year, or 5% per year plus the federal discount rate that exists on the 25th day of the month preceding the date of the loan contract or date the loan was made, whichever is greater. The rate is set by California’s constitution, but there are exceptions for federal banks, credit card companies, and other institutional lenders, including the VA and FHA.
Investment loans used to purchase, build or improve real estate, also known as “hard money loans”, are considered loans for “any other purpose” and are subject to the higher of the 10% rate or the rate based upon the federal discount rate.
The usury law is NOT applied to loans by a seller to the buyer known as seller carry back loans because they are not considered to be a loan or forbearance of money, and instead, are considered to be a sale on credit.
If a licensed real estate broker, not a salesperson/agent, has “made or arranged” the loan, then the usury law DOES NOT apply. The broker must be actively involved in negotiating or otherwise arranging the loan, but this does not include merely filing out preprinted forms. The broker must also be acting for compensation or in expectation of receiving compensation. The broker exemption includes loans secured by real property in the form of promissory notes secured by deeds of trust.
The only limits on the fees or points that can be charged on a broker exempt loan are if the first deed loan is less than $20,000, or a junior loan is less than $10,000. Otherwise, there is NO LIMIT on the fees and points that can be charged, in addition to no limit on the interest rate.
Recourse Against Usurious Loans and Lenders
If a loan is determined to be usurious, the lender is still entitled to recover the principal amount of the loan, but he forfeits all of the interest earned on the loan to the maturity date. However, the borrower may be able to recover penalty damages up to 3 times the interest actually paid during the one year immediately prior to the filing of the lawsuit, and can recover interest paid for the two years prior to the lawsuit.
Although a lender can still sue a borrower to collect on a usurious loan, he can only recover the principal, and any interest that accrues after the maturity date of the loan to the date of judgment.
These opinions do not create an attorney-client or a broker-client relationship, or constitute legal or tax advice.
Craig B. Forry, has been a California attorney since 1984 (SBN 113432), and a California Realtor® since 2004 (DRE 01446739), and is the founder of Forry Law Group, and a co-owner of CARES Realty, Inc. Individual circumstances vary and professional advice is recommended before making any decisions concerning legal matters. You can contact Craig using the form below.
Forry Law Group
15501 San Fernando Mission Blvd., Suite 309
Mission Hills, CA 91345
Office: (818) 361-1321
Fax: (818) 365-6522
Monday – Friday 9:00 am to 5:00 pm
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