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April 2003
California Usury Law. Are You Charging An Illegal Interest Rate on a Loan or Promissory Note?
Prepared By: Melissa C. Marsh, Los Angeles Business Attorney
Last Updated: July 9, 2008
Usury is the charging of interest in excess of that allowed by law. California courts have held that "interest" includes anything of value that is received directly or indirectly by the lender from the borrower regardless of the nature or form of the consideration (e.g., fees, bonuses, commissions, and other miscellaneous charges).
California's usury laws, set forth in Article XV Section 1 of the California Constitution and codified in 10 different code sections, regulate the maximum amount of interest which can be charged on any loan, or forbearance of money. Pursuant to California law, individuals and businesses (other than licensed lending institutions and pawnbrokers) can charge a maximum of: (i) 10% interest per year for money, goods or things used primarily for personal, family or household purposes and (ii) for other types of loans (home improvement, home purchase, business purposes, etc.), the greater of 10% interest per year, 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 date the loan is contracted for or executed. It should be noted that in California an exemption exists for home owner associations (HOAs), which are permitted to charge up to 12% per year.
Multiple California code sections govern the legal rate of interest that may be agreed upon including:
- CALIFORNIA CIVIL CODE SECTION 1917-1917.006
- CALIFORNIA CIVIL CODE SECTION 1917.060-1917.069
- CALIFORNIA CIVIL CODE SECTION 1917.160-1917.168
- CALIFORNIA CIVIL CODE SECTION 1917.610-1917.619
- CALIFORNIA COMMERCIAL CODE SECTION 9201-9208
- CALIFORNIA CORPORATIONS CODE SECTION 25116 – 025118
- CALIFORNIA FINANCIAL CODE SECTION 22050-22062
- CALIFORNIA FINANCIAL CODE SECTION 22050-22064
- CALIFORNIA GOVERNMENT CODE SECTION 5900-5909
So When is a Loan Usurious?
A loan will be deemed to be usurious when the interest charged exceeds the maximum amount prescribed by law. The lender's knowledge is immaterial. The plaintiff need not prove intent, and failure to know the law is no defense.
So What Happens if a Loan is Deemed Usurious?
If a loan is deemed to be usurious, the originator of a usurious loan is subject to severe civil penalties. The borrower is generally entitled to the following cumulative remedies:
- the borrower can bring an action for money damages for ALL the money he has previously paid during the two year period prior to the filing of an action (not just the usurious amount);
- the borrower can recover damages equal to three times the interest paid during the one year period prior to the filing of a lawsuit, and after filing of the lawsuit (See, Handi Investment Company v. Mobil Oil Corporation, 653 F2d 391 (1981));
- the borrower can get a judgment to cancel all future interest that will become due for the remainder of the term of the loan; and
- 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 potentially costly damages and a potential for criminal liability. Any willful violation of the usury laws may also be a violation of Business & Professions Code § 17000, et. seq., which would expose the lender to criminal liability. If a court were to find 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.
What about the principal? Even if a loan is deemed to be usurious, the lender is still entitled to receive the principal back and to retain any security for the loan.
What Are Some of the Exemptions From the Usury Law.
California's usury laws do not apply to loans made by a California licensed financial institutions and lenders (bank, savings and loan, credit union, credit card, business licensed to make consumer loans, pawnbroker, time payment contract whereby the seller will finance the purchase of some good by extending the payment over a period of time, etc...). The usury laws also do not apply to loans made by a California licensed real estate broker when the loan is secured (in whole or in part) by real estate.
Conclusion.
In California, a simple loan can turn into a disastrous event, even if there was intent to violate the usury laws. Before borrowing, or more importantly, lending money consider the impact of the usury laws on the transaction and consult an attorney as there are other laws that may come into play. A little bit of planning and forethought can prevent hefty legal bills and headaches. If you are a borrower, you should examine all loans received from non financial institutions to determine whether the usury laws can be used for your economic benefit. It is important to act quickly, however, as the statute of limitations is just two (2) years, and just One (1) year for those seeking treble damages.
If you have any questions, or would like further information on usury, loans, or promissory notes, please call 818.849.5206 or Email Us.
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California Business Law attorney, Melissa C. Marsh, is based in Sherman Oaks and West Hollywood, and serves individuals throughout Los Angeles County, including: West Hollywood, Miracle Mile, Beverly Hills, Century City, Santa Monica, Burbank, North Hollywood, Valley Village, Toluca Lake, Studio City, Sherman Oaks, Van Nuys, Encino, and Woodland Hills.
© 2003 Melissa C. Marsh. All Rights Reserved.
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