The California Constitution prohibits loans that are made primarily for personal, family or household purposes from having interest rates above 10% per year.  This is California’s general usury law.  However, there are many exceptions.

First, as implied from the above, loans made for business purposes are not capped at 10% interest (although there are other caps).

HOME LOAN EXEMPTION

Second, a loan that is taken out to be used primarily for buying a home (i.e. a mortgage) or improving a home (i.e. a construction loan) are not considered loans for personal, family or household purposes, and thus are not capped at 10% interest rates.

The cap on any other loans which are not for personal, family or household purposes is the higher of 10% or 5% over the amount charged by the Federal Reserve Bank of San Francisco on advances to member banks on the 25th day of the month before the loan (if the agreement to loan and the actual lending of the money are in different months, the 25th day of the month before the earlier event is used).

BANKING & LENDING INSTITUTION EXEMPTION

A third group of exempt entities are most lending institutions such as banks, credit unions, finance companies, pawn brokers, etc. There are state law limits on these loans as well, but they are higher than the usury laws listed above.

HOME STATE ADVANTAGE (FEDERAL INTEREST RATE EXPORTATION)

Banks also get the benefit of the usury laws in their “home state.”  In other words, the usury limit in the state where the bank is headquartered will apply, regardless of where the loan proceeds were issued.  Thus, if the bank’s home state has a 20% usury limit, and the state in which the loan was issued has a limit less than 20%, the bank will still be allowed to charge up to 20%.

CREDIT CARDS NOT LOANS

Money advanced by credit cards (retail installment contracts and revolving accounts) are not generally regarded as loans, and thus the usury laws normally do not apply to them. There are no limits on finance charges for credit cards.

REAL ESTATE BROKER EXEMPTION

A fourth exception to the usury law is the real estate broker exception. This applies when a loan is secured by real property and either the broker gave the loan or “arranged” the loan.[1]  The broker is not required to have been the broker on the deal.  Moreover, acting a broker does not mean that they “arranged” the loan.

The broker must act in more than a minimal capacity to be found to have “arranged” the loan.

See e.g., Gibbo v. Berger, 19 Cal. Rptr. 3d 829 (2004), which found that a broker that acted as an escrow agent on a transaction (prepared the loan documents using preprinted forms, obtained a title insurance policy, and disbursed funds) was insufficient to exempt the lender from usury limits.  The California Appellate Court in Gibbo concluded that “the phrase ‘arranged by’ must refer to some conduct by a real estate broker, acting as a third party intermediary rather than as a party to the loan, that causes a loan to be obtained or procured.” The Court provided examples of conduct that amounts to “arranging” the loan such as “structuring the loan as the agent for the lender (Chapman v. Farr (1982) 132 Cal.App.3d 1021, 1026, 183 Cal.Rptr. 606);  setting the interest rate and points to be paid, setting the terms of the forbearance agreement, reviewing the loan and forbearance documents, conducting title searches, or drafting the terms of the loan (Jones v. Kallman (1988) 199 Cal.App.3d 131, 135, 244 Cal.Rptr. 609;  Del Mar v. Caspe, supra, 222 Cal.App.3d at p. 1328, 272 Cal.Rptr. 446).”

In Bock v. California Capital Loans, Inc. (California Court of Appeal, Third District, Case No. C069863, May 14, 2013), the Court found that a real estate broker can perform services for both the seller and the buyer.  The broker in Bock did not collect commission on the transaction, and instead just arranged for the buyer/plaintiff to borrow $1.2 million at the interest rate of 15%.  The broker did so through his company, California Capital Loans, Inc. (“CCL”), of which he was the sole shareholder, and loan was secured against the real property sold.  CCL foreclosed and purchased the property at the trustee’s auction.  The former buyer/plaintiff sued for violation of usury laws.

The Court also held that the broker “arranged” for the loan notwithstanding that he did so through a company wholly owned by him. 

The Court found that the broker “arranged” a loan “for another” under the meaning of the statute—he arranged for the buyer (“another”) to get a loan through CCL.  The Court found that, although the broker was the sole shareholder of CCL, the company was still a separate legal entity.  This holding may be at odds with Gibbo, which specifically held that the broker may not be a party to the loan.  The Bock Court actually found that the broker was not a party to the loan, as the party was technically the company, but this seems to sidestep Gibbo, and another Court may come down a different way under these same facts.

The Court found that the second requirement under the statute, that the broker was working “for or in expectation of compensation,” was also met.  Although he did not collect commission as a broker, because he was a shareholder of CCL, he was working in expectation of compensation through the interest on the loan.

[1] California Civil Code section 1916.1 (usury laws do not apply to loans secured by real property arranged for another by a licensed real estate broker working for or in expectation of compensation).

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