Understanding California's Usury Laws And Their Applicability

Usury laws in California place a cap on the amount of interest that can be charged on loans, protecting borrowers from excessive costs. These laws apply to most lenders but there are several notable exemptions. National banks, federal credit unions, and licensed lenders such as banks, credit unions, and payday lenders are exempt from these laws. Additionally, certain types of loans, such as small loans below $2,500 and certain real estate-secured loans, may be exempt. Understanding these laws is crucial for lenders and borrowers alike to ensure compliance and avoid legal issues.

National banks and federal credit unions

National banks are able to take advantage of this exemption due to their national charter. By being based in a state with more lenient or non-existent usury laws, such as Delaware or South Dakota, they can effectively bypass California's usury laws and charge higher interest rates. This is a significant benefit for these banks as it allows them to generate more revenue from their lending activities.

Federal credit unions also benefit from this exemption, allowing them to charge higher interest rates than they would be able to if they were subject to California's usury laws. This can result in increased profits for these institutions, which can then be reinvested into the credit union or returned to members in the form of higher dividends or improved services.

It is important to note that while national banks and federal credit unions are exempt from California's usury laws, they are still subject to certain regulations and oversight. The Department of Business Oversight, for example, plays a role in licensing and regulating lenders, ensuring that they operate within the boundaries of the law. Additionally, there are federal laws and regulations that apply to these institutions, such as the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (Credit CARD Act), which imposes restrictions on interest rates and mandates transparency in notifying cardholders of rate increases.

In conclusion, 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 their home state. This exemption provides these institutions with greater flexibility in the interest rates they can charge, which can have a significant impact on their financial performance. However, it is crucial for these entities to remain compliant with other applicable laws and regulations to avoid legal issues and maintain their exempt status.

Licensed lenders

California's usury laws are complex and apply differently to licensed lenders than they do to private lenders. The state of California licenses some lenders, allowing them to charge higher interest rates than the maximum rate of 10% per year. These include banks, credit unions, finance lenders, and payday lenders. However, the Department of Business Oversight must license and regulate these lenders.

The usury laws also do not apply to any real estate broker if the loan is secured by real estate, regardless of whether they are acting as a real estate broker or not. Additionally, certain real estate loans obtained to buy real estate, build a home, or make improvements may be exempt if the loan is made or arranged by a real estate broker.

It's important to note that usury laws in California aim to protect consumers from predatory lending practices. Licensed lenders must still comply with certain regulations and ensure they don't exceed the allowable interest rates for different types of loans.

Small loans

In California, usury is the charging of interest in excess of that allowed by law. The California Constitution allows parties to contract for interest on a loan primarily for personal, family, or household purposes at a rate not exceeding 10% per year. This 10% limit is based on the unpaid balance. For example, if a $1,000 loan is to be paid at the end of one year and there are no payments during the year, the lender could charge $100 (10%) as interest. However, if payments are made during the year, the maximum charge would be less as the outstanding balance would be reduced.

The usury laws do not apply to all lenders and loans. For example, national banks, federal credit unions, and licensed lenders are exempt from California's usury laws. Additionally, certain types of loans, such as real estate loans, seller-financed loans, and loans to businesses, may be exempt under certain conditions.

It is important to note that usury laws in California are complex, and there are many exemptions and exceptions. Failure to comply with these laws can result in severe civil and criminal penalties.

Real estate-secured loans

California's usury laws place a cap on the amount of interest that can be charged on loans, protecting the public and underprivileged borrowers from excessive borrowing costs. The state's usury limit is generally 10% per year, with certain exemptions.

• The interest rate restrictions of the Usury Law do not apply to loans or forbearances secured by real property if they are "made or arranged" by a California Department of Real Estate (DRE) licensed broker who receives or expects compensation for their services.
• To qualify for this exemption, the loan or forbearance must be secured by real property, and the DRE broker must either receive or expect compensation for soliciting, negotiating, or arranging the loan.
• The broker must actively participate in negotiating the loan terms and prepare or review the loan documents to satisfy the "arranged" requirement.
• If a DRE-licensed broker was not previously compensated for their services in connection with the real estate transaction, any loan workout, such as a forbearance, extension, or loan modification, needs to be arranged by the same broker to avoid potential usury issues.
• DRE brokers who make loans with their own funds, hold the loan, and wish to modify it are not subject to the same restrictions.
• The Usury Law does not apply to the extension of purchase money financing from a seller to finance the sale of real property. This is known as the time-price differential doctrine and is considered a renegotiation of the original sale price.
• California's Usury Law also includes protections for borrowers, allowing them to take action and seek remedies for violations, such as recovering penalty damages or cancelling future interest on the loan.

Seller-financed loans

In California, when a seller of real estate finances the purchase for the buyer with a note secured by a deed of trust, the financing is known as a seller carry back loan. In this scenario, the seller is acting as the lending institution. Typically, a seller will offer to carry back all or a part of the purchase price to ensure the sale of the home, especially if banks are unwilling to lend the total amount of financing required.

Some California courts have ruled that these types of situations are not loans but sales on credit, making them exempt from the state's usury law. This is referred to as the Time Price Doctrine. In other words, the financing is considered an expression of the purchase price rather than a loan or forbearance.

It is important to note that the usury law in California sets a maximum interest rate of 10% per year for non-exempt lenders. This rate applies to loans for money, goods, or things used primarily for personal, family, or household purposes. For other types of loans, such as home improvement, home buying, or business expenses, the non-exempt lender can charge the greater of 10% annual interest or 5% plus the Federal Reserve Bank of San Francisco's discount rate.

Frequently asked questions