Usury Laws And Private Loans: What's The Verdict?

Usury laws are in place to protect consumers from excessive interest rates on loans. These laws, which vary from state to state, set a maximum interest rate that lenders can charge. In the US, there is no federal limit on interest rates, so each state has its own statutes, with significant variation between them. For example, California restricts simple interest on loans to 10% per year, while the interest rate cap in the District of Columbia is more than twice that at 24%. Usury laws apply to private loans, but there are some exceptions, including for certain types of loans and licensed lenders.

Usury laws in California

A Brief History of California Usury Law

The California Usury Law began in 1918 with initial statutes establishing a maximum allowable interest rate of 12% per year. With some constitutional amendments, most notably the 1979 constitutional amendment, Article XV, Section 1, California's usury limit is now generally 10% per year with a broader range of exemptions.

In California, the maximum allowable interest rate for consumer loans is 10% per year. For non-consumer loans, the interest rate can be the maximum of either 10% per annum or the "federal discount rate" plus 5%. If there is no agreement between the parties on the interest rate, the law imposes a rate of 7%.

Interest includes anything of value received by a lending entity from the borrower, including fees, bonuses, commissions, discounts, compensation, and similar charges. Legitimate third-party costs, such as legal fees, title insurance, recording fees, and escrow fees, are not counted. Late charges do not count as interest since late payments are considered voluntary by the borrower.

The Usury Law only applies to loans or forbearances. A forbearance is the extension of additional time for the repayment of an obligation or an agreement not to enforce a claim on its due date. The Usury Law does not apply to at-risk investment transactions, judgments, or the consideration paid for the performance of work or services.

Licensed Entities Exempt from Usury

Any loan arranged by a lender or broker licensed by the State of California is exempt from usury. There are two types of licenses for mortgage lending in California: the Real Estate Broker License and the California Finance Lender (CFL) License. Private mortgage loans originated by lenders and brokers with an active license are exempt from usury in California.

Lending in California Without a License

Lenders and individual investors without a license should consider working with a licensed broker to arrange or originate the loan to be exempt from usury. Unlicensed lenders may arrange their own loans directly to borrowers, but they are subject to the state's usury law, with a maximum annual percentage rate of 10%.

Usury Triggers for Note Investors

Many private mortgages in California are arranged by a licensed broker/lender but funded by a note investor. If the note investor is unlicensed, they should be cautious about making changes to the loan during the loan term, as it could trigger the usury law. For example, providing additional funds to the borrower or extending the loan term and charging a fee could cause the loan to be subject to usury.

Usury laws in New York

Usury laws are in place to protect consumers from excessive interest rates on loans. Usury is the interest that a lender charges a borrower that is over the lawful maximum rate. In New York, charging an interest rate in excess of 16% on a loan or forbearance is civil usury, while an interest rate in excess of 25% is criminal usury.

There are various exemptions from the civil and criminal usury provisions. Loans or forbearances of $250,000 or more are generally exempt from civil usury statutes but remain subject to criminal usury statutes. Loans or forbearances of $2,500,000 or more are exempt from both civil and criminal usury statutes. The civil usury cap does not apply to defaulted obligations, and loans or forbearances secured under Article 9 of the New York Uniform Commercial Code are not subject to civil or criminal usury limitations if the interest charged is not greater than eight percentage points above the prime rate.

Corporations and limited liability companies are generally barred from asserting civil usury as a defence. However, any defendant, including corporations and limited liability companies, may assert criminal usury as a defence. Under the civil usury statute, a loan is void if the interest rate exceeds 16%. Criminal usury must be asserted as an affirmative defence, and it is unclear under New York law whether a criminally usurious loan is void from the outset or whether a successful defence based on criminal usury results in the cancellation of the interest obligation or a revised obligation to pay a non-usurious rate.

While this ambiguity may allow a creditor to file an action to collect a criminally usurious loan, it opens the creditor to the risk of criminal prosecution. Criminal usury is a class E felony, punishable by up to four years' imprisonment. If the creditor has previously been convicted of criminal usury, attempted to commit criminal usury, or if their conduct was part of a scheme or business of making or collecting usurious loans, they may be guilty of criminal usury in the first degree, which is a class C felony punishable by up to 15 years' imprisonment.

Usury laws in Oregon

The definition of a financial institution in Oregon is important to note. It includes not only banks but also other lenders and brokers that are licensed by the state. These licensed entities are exempt from usury laws, which means they can charge interest rates above the 9% limit. However, it is essential to understand that usury laws in Oregon still apply to loans made between individuals. For example, if you lend money to a friend and charge interest above the legal limit, the loan could be considered usurious.

To establish usury, three basic elements must be present: a loan, an agreement to repay the money, and an agreement that includes interest higher than the legal allowance. If these elements are present, the lender may not be able to collect interest on the loan, even if the borrower agreed to the interest rate. An experienced attorney can provide guidance and litigate matters related to usurious loans.

It is worth mentioning that usury laws in Oregon do not apply to loans made to corporations, limited liability companies, or limited liability partnerships. These types of commercial loans are not covered by civil usury laws. Additionally, credit card companies have some leeway regarding the amount of interest they charge. They are allowed to follow the maximum interest rates in the state where they are incorporated, which may have less restrictive usury laws.

Usury laws in Washington State

Usury is the interest that a lender charges a borrower that is over the lawful maximum rate. Usury laws are in place to protect consumers from exorbitant interest rates on various types of loans, such as credit cards, payday loans, and personal loans.

In Washington State, usury limits depend in part on the type of lender. For example, a licensed check casher or check seller who has obtained a "small loan endorsement" from the Department of Financial Institutions may make a "small loan" of up to $700 at interest rates that exceed the maximum rate of interest under Washington State's usury law.

There are many instances where the usury law does not apply. These are known as exceptions to the usury law. For example, Washington State's usury law does not apply to credit card debt, which frequently exceeds the maximum rate of interest. This is because the state's usury law generally does not apply to debts related to "retail installment transactions."

Another exception to the usury law is for most first lien residential mortgage loans. Federal law generally takes precedence over Washington State's usury law for these types of loans.

Usury laws apply to private loans, which are loans made between individuals and private lending institutions, as well as loans made between individuals.

Usury laws in the District of Columbia

Usury laws are in place to protect consumers from excessive interest rates on loans. They apply to consumers and others who borrow from creditors. These laws ensure that lenders do not take advantage of those who are in desperate need of funds.

In the District of Columbia, the basic usury law is a 6% interest rate. However, there are several exemptions to this rule. For instance, credit cards are allowed to charge up to 18% interest, credit unions 12%, and there is no ceiling for commercial loans. Additionally, at the time of writing, the interest rate ceiling for mortgages was 11%, and borrowers were only permitted to pay one point on the loan to the lenders.

It is worth noting that state interest rate limits are generally weak and may not apply to credit cards, federally insured bank accounts, and other popular types of debt. National banks can legally charge the highest rate allowed in their home state, regardless of the borrower's location.

If you are in the District of Columbia and are concerned about the interest rates on your loan, it is recommended that you contact a qualified attorney for advice.

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