California Usury Laws: Business Loan Exemptions And Applicability

California's usury laws are complicated and can be overwhelming. The state's usury laws restrict 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 10% annual interest for money, goods or things used mainly for personal, family or household purposes. For other types of loans, including business expenses, non-exempt lenders can charge the greater of 10% annual interest or 5% 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.

However, it's important to note that California provides a large number of exemptions from its usury laws. For example, loans made or arranged by licensed real estate brokers that are secured in whole or in part by a lien on real property are exempt from the usury law. Additionally, most licensed lending institutions, such as banks, credit unions, and finance corporations, are exempt from California's usury regulations.

Interest rate for business loans

Interest rates for business loans in California depend on several factors, including the type of loan, the lender, and the borrower's qualifications.

Interest Rate Caps for Non-Exempt Lenders

In California, non-exempt lenders can charge a maximum of 10% annual interest for money, goods, or services used mainly for personal, family, or household purposes. For other types of loans, including business expenses, non-exempt lenders can charge the greater of 10% annual interest or 5% plus the Federal Reserve Bank of San Francisco's discount rate on the 25th day of the month preceding the loan's execution.

Average Interest Rates for Business Loans

The average interest rate for small business loans varies depending on the lender and loan type. Bank small-business loans typically have the lowest rates, ranging from 6.42% to 12.41% in the second quarter of 2024, according to the Federal Reserve. Online lenders have higher interest rates, ranging from 6% to 99%, due to looser eligibility requirements.

Factors Affecting Interest Rates

Several factors can influence the interest rate on a business loan:

• Lender: Traditional banks have stricter requirements but offer lower interest rates compared to online lenders.
• Loan type: Different types of small-business loans have varying interest rates. Loans backed by the Small Business Administration (SBA) often offer the lowest rates.
• Financial situation: Lenders consider the borrower's credit score, time in business, business income, and ability to repay the loan. A riskier borrower may be offered a higher interest rate.
• Collateral: Providing collateral, such as business inventory or property, can help borrowers access lower interest rates and improve their chances of loan approval.

Tips for Getting the Best Interest Rate

To obtain the most competitive interest rates, borrowers should aim to demonstrate their creditworthiness and low-risk status. Here are some strategies to achieve this:

• Improve your credit score: Dispute any errors on your credit reports, make frequent debt payments, and reduce your overall debt.
• Offer collateral: Securing the loan with physical collateral can help lower the interest rate and increase the likelihood of loan approval, especially for startups or borrowers with lower credit scores.
• Add a cosigner: Including a cosigner with a strong credit and financial history can improve your chances of obtaining a lower interest rate.
• Provide a thorough business plan: A well-prepared business plan can give the lender confidence in your business's prospects and ability to repay the loan.

Sources of Business Loans in California

California offers several state and local government-led small business loan programs that provide affordable funding options for businesses in the state. Here are some examples:

• California Small Business Loan Guarantee Program: Offers loan guarantees of 80% to 95% for small businesses with 1 to 750 employees.
• Valley Economic Development Center Small Business Loans: Provides standard business loans, microloans, and microenterprise loans ranging from $2,500 to $500,000 with interest rates as low as 7.75%.
• SMART Funding Program: Offers affordable business loans ranging from $25,000 to $1.5 million for small to medium-sized businesses in Los Angeles County in sectors such as manufacturing, clean tech, medical, and transportation.
• Accion Rapid Loans: Offers small business loans of $300 to $8,000 with fixed simple interest rates of 14% to 18% for businesses in Imperial, Riverside, San Bernardino, and San Diego counties.
• California Capital Access Program for Small Business (CalCAP): A loan loss reserve program that provides up to 100% coverage for small business loans from participating California lenders, with loan amounts of up to $5 million.
• Jewish Free Loan Association Small Business Loans: Offers interest-free small business loans of up to $36,000 to small businesses in Los Angeles and Ventura counties with excellent credit and steady income.
• Wells Fargo SBA Loans: Wells Fargo, the top SBA lender in California for 2018, offers SBA-backed loans with competitive interest rates to small businesses in the state.
• Working Solutions: A nonprofit Community Development Financial Institution (CDFI) serving the San Francisco Bay Area, offering microloans of up to $50,000 with interest rates starting at 9%.
• Los Angeles Federal Credit Union (LAFCU): Offers business loans ranging from $20,000 to $5 million to its members in Southern California and Los Angeles.
• Fresno First Bank SBA Loans: A community bank in California's Central Valley offering various SBA loans, including 7(a), 504, and express loans, with competitive interest rates.

By understanding California's usury laws and the factors affecting interest rates, borrowers can make informed decisions when seeking business loans and work towards obtaining the most favourable terms.

Usury law exemptions

Usury laws in California place a cap on the amount of interest that can be charged on loans to protect borrowers from excessive borrowing costs. However, there are several exemptions to these laws.

Firstly, national banks and federal credit unions are exempt from California's usury laws due to federal preemption, allowing them to charge interest rates that are legal in the state where they are based.

Secondly, certain licensed lenders, including banks, credit unions, finance lenders, and payday lenders, are exempt if licensed and regulated by the Department of Business Oversight.

Thirdly, small loans of $2,500 or less may be subject to different usury laws, with interest rates depending on the loan size.

Additionally, certain real estate-secured loans are exempt if made or arranged by a licensed real estate broker, provided specific conditions are met.

Furthermore, loans made to California-based corporate entities with assets of at least $2 million or loans exceeding $300,000 may be exempt if the lender and borrower have a pre-existing relationship or are assumed to have the capacity to protect their interests.

Lastly, the Usury Law does not apply to at-risk investment transactions, judgments, or the consideration paid for the performance of work or services.

While these exemptions provide flexibility, it is crucial for lenders and borrowers to understand California's usury laws to ensure compliance and avoid legal issues.

Civil penalties for lenders

California's usury laws are complex and the consequences of violating them can be severe. If a loan is deemed usurious, the lender may face stiff civil penalties. The borrower has several remedies available to them, which may be used cumulatively. These include:

• The borrower can bring an action for monetary damages for all funds paid over the two-year period preceding the suit.
• The borrower can seek damages equal to three times the interest paid during the 12 months prior to the filing of a lawsuit, and after filing of the lawsuit.
• The borrower can get a judgment to cancel all future interest that will become due for the remainder of the loan.
• In appropriate cases, where the lender's conduct is oppressive, fraudulent or malicious, the borrower may be able to recover punitive damages.

The result is that a usurious loan may turn 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.

If a court finds that the lender knowingly or willfully charged a usurious interest rate, the lender may be found guilty of "loan sharking", which is a felony punishable by up to five years in jail.

Criminal charges for lenders

California's usury laws place a cap on the amount of interest that can be charged on loans to protect borrowers from excessive borrowing costs. Usury is a criminal offence in California, and lenders who violate these laws may face imprisonment or fines.

The California Financing Law requires the licensing and regulation of finance lenders and brokers and prohibits misrepresentations, fraudulent and deceptive acts in connection with the making and brokering of loans. It also provides administrative, civil, and criminal remedies for violations. The law makes it a crime for any person to receive or take usurious interest, with potential imprisonment of up to five years or incarceration in county jail for up to one year.

Additionally, under California's false advertising law, making false or misleading statements during the course of advertising products or services is prohibited. Violation of this law can result in a misdemeanour charge punishable by up to six months in county jail and a maximum fine of $2,500.

Predatory lending, a practice that involves imposing unfair and abusive loan terms on borrowers, has also garnered attention in California. This type of lending becomes criminal when the lender manages the loan transaction to extract maximum value without regard for the borrower's ability to repay. Common predatory lending schemes include target marketing based on illegal discriminatory practices and abusive loan terms with excessive interest rates and unnecessary fees.

Predatory lending can be prosecuted as a state or federal crime, with penalties depending on the specific facts of the case. In California, it is not listed as a specific crime but falls under various laws, including grand theft, conspiracy to commit grand theft, forgery, and false advertising. Violators may face imprisonment and substantial fines, depending on the charges and their classification as misdemeanours or felonies.

To summarise, lenders in California must comply with usury laws and fair lending practices to avoid criminal charges. Violations of usury laws can result in imprisonment and fines, while predatory lending practices can lead to various state or federal charges with corresponding penalties.

Usury law history

The concept of usury has a long history, and throughout most of it, it has been understood as charging financial interest in excess of the principal amount of a loan. However, in some instances, especially in modern times, it has been interpreted as interest above the legal or socially acceptable rate. The practice of usury can be traced back to approximately four thousand years, and during its subsequent history, it has been repeatedly condemned, prohibited, scorned, and restricted, mainly on moral, ethical, religious, and legal grounds.

Ancient History

The oldest known references to usury are found in ancient Indian religious manuscripts. The earliest record comes from the Vedic texts of Ancient India (2000-1400 BCE), which mention the usurer (kusidin) several times, interpreted as any lender at interest. More frequent references to interest payment are found in the later Sutra texts (700-100 BCE) and the Buddhist Jatakas (600-400 BCE). During this period, the first sentiments of contempt for usury emerged. Vasishtha, a well-known Hindu lawmaker, forbade the higher castes of Brahmanas (priests) and Kshatriyas (warriors) from being usurers or lenders at interest.

By the second century CE, usury had become a more relative term. The Laws of Manu state that stipulated interest beyond the legal rate cannot be recovered, referring to it as a "usurious way of lending." This dilution of the concept of usury continued through Indian history, and today, while still condemned in principle, usury refers only to interest charged above the socially accepted range and is no longer significantly controlled.

Ancient Western Philosophy

Several Ancient Western philosophers, including Plato, Aristotle, Cato, Cicero, Seneca, and Plutarch, condemned usury. This sentiment was reflected in the Lex Genucia reforms in Republican Rome (340 BCE), which outlawed interest altogether. However, ways to evade this legislation were found, and by the last period of the Republic, usury was once again common. Under Julius Caesar, a ceiling on interest rates of 12% was set, and later, under Justinian, it was lowered to between 4% and 8%.

Islam

Criticism of usury in Islam was well-established during the Prophet Mohammed's life and is reinforced by various teachings in the Quran, which date back to around 600 CE. The original word used for usury in this text was "riba," which means excess or addition and directly refers to interest on loans. According to Islamic economists, by the time of Caliph Ulmar, the prohibition of interest was a well-established principle in the Islamic economic system.

Judaism

Criticism of usury in Judaism has its roots in several Biblical passages where the taking of interest is forbidden, discouraged, or scorned. The Hebrew word for interest, "neshek," means "a bite" and refers to the exaction of interest from the debtor's perspective. The associated Exodus, Leviticus, and Deuteronomy texts extend this prohibition to all moneylending, except business dealings with foreigners.

Christianity

Despite its Judaic roots, the critique of usury was most fervently taken up by the Christian Church, where the debate prevailed for over a thousand years. The Roman Catholic Church prohibited the clergy from taking interest by the fourth century CE and extended this rule to the laity in the fifth century. In the eighth century, under Charlemagne, usury was declared a general criminal offense. This anti-usury movement continued to gain momentum during the early Middle Ages, reaching a zenith in 1311 when Pope Clement V made the ban on usury absolute and declared all secular legislation in its favour null and void.

Modern Era

In the context of the modern interest-based global economy, the significance of the historical critique of usury is greater than ever before. Usury laws continue to evolve, and while they vary across jurisdictions, the underlying principle of protecting borrowers from excessive interest rates remains a common thread.

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