Is this interest rate usurious in California?
It depends on who made or arranged the loan as much as on the rate, and the rate itself is in the Constitution. The essential elements of usury are: (1) the transaction must be a loan or forbearance; (2) the interest to be paid must exceed the statutory maximum; (3) the loan and interest must be absolutely repayable by the borrower; and (4) the lender must have a willful intent to enter into a usurious transaction (Ghirardo). In Ghirardo itself the FIRST element decided the case: the restructuring was neither a loan nor a forbearance, the prerequisite to the usury law, because it was a modification of a credit sale, and the modification retained the credit sale's exemption, so the usury law did not apply at all. The constitutional rate limits do not apply at all to a loan, or a forbearance, extension or modification of a loan, made or ARRANGED by a person licensed as a California real estate broker and secured, directly or collaterally, in whole or in part by liens on real property (Civ. Code § 1916.1). Article XV, section 1 sets the ceiling: absent a written contract the rate is 7 percent; by written contract, a loan or forbearance for use primarily for personal, family or household purposes may bear up to 10 percent per annum (a loan whose proceeds go primarily to the purchase, construction or improvement of real property is deemed not to be such a use), and any other loan or forbearance up to the higher of 10 percent or 5 percent plus the rate prevailing on the 25th day of the month preceding the earlier of the contract date or the funding date, as established by the Federal Reserve Bank of San Francisco on advances to member banks. No one may take more than that "by charging any fee, bonus, commission, discount or other compensation". And the section itself lists the EXEMPT CLASSES: building and loan associations, industrial loan companies, credit unions, licensed pawnbrokers and personal property brokers, loans made or arranged by a licensed real estate broker and secured by liens on real property, banks under the Bank Act or any law of this state or the United States, agricultural cooperative associations and marketing partnerships, borrowers from a federal intermediate credit bank, "any other class of persons authorized by statute", and any successor in interest to an exempted loan or forbearance, so the list is not closed, which is why the same rate is lawful from a bank and usurious from a private lender.
The trap
The exemption, not the rate, can decide the California usury question, and it turns on a fact outside the note: a loan secured by real property and made or ARRANGED by a licensed real estate broker is outside the constitutional limits, where 'arranged' covers a broker acting for compensation or in expectation of compensation in soliciting, negotiating or arranging it, and 'made or arranged' includes a loan made by the broker as principal whether or not acting within the scope of the licence (§ 1916.1, second and third sentences). The identical rate can therefore be lawful or unlawful depending on how the deal was sourced. On intent, Ghirardo explains, quoting earlier authority, that the intent required is to take the interest received, not a conscious attempt, with knowledge of the law, to evade it. The number most people quote, 10 percent, is only the personal, family and household ceiling; a business loan's ceiling floats with the Federal Reserve Bank of San Francisco's rate on advances to member banks and is the higher of that plus 5 percent or 10 percent, and a real-property purchase or construction loan is constitutionally deemed NOT a personal-purpose loan even to a consumer. The constitutional section and Civ. Code § 1916.1 are cited here, but not the uncodified 1919 Usury Law (Civ. Code §§ 1916-1 to 1916-3), so the treble-damages remedy and its limitation period are not stated here.
9 authorities
The words that state the rule
The essential elements of usury are: (1) The transaction must be a loan or forbearance; (2) the interest to be paid must exceed the statutory maximum; (3) the loan and interest must be absolutely repayable by the borrower; and (4) the lender must have a willful intent to enter into a usurious transaction.
- statuteCal. Civ. Code § 1916.1enactment date not established
The words that state the rule
The restrictions upon rates of interest contained in Section 1 of Article XV of the California Constitution shall not apply to any loan, or any forbearance, extension, or modification of a loan, made or arranged by any person licensed as a real estate broker by the State of California, and secured, directly or collaterally, in whole or in part by liens on real property.
- statuteCal. Const. art. XV, § 1enactment date not established
The words that state the rule
The rate of interest upon the loan or forbearance of any money, goods, or things in action, or on accounts after demand, shall be 7 percent per annum but it shall be competent for the parties to any loan or forbearance of any money, goods or things in action to contract in writing for a rate of interest: (1) For any loan or forbearance of any money, goods, or things in action, if the money, goods, or things in action are for use primarily for personal, family, or household purposes, at a rate not exceeding 10 percent per annum; provided, however, that any loan or forbearance of any money, goods or things in action the proceeds of which are used primarily for the purchase, construction or improvement of real property shall not be deemed to be a use primarily for personal, family or household purposes; or (2) For any loan or forbearance of any money, goods, or things in action for any use other than specified in paragraph (1), at a rate not exceeding the higher of (a) 10 percent per annum or (b) 5 percent per annum plus the rate prevailing on the 25th day of the month preceding the earlier of (i) the date of execution of the contract to make the loan or forbearance, or (ii) the date of making the loan or forbearance established by the Federal Reserve Bank of San Francisco on advances to member banks under Sections 13 and 13a of the Federal Reserve Act as now in effect or hereafter from time to time amended (or if there is no such single determinable rate of advances, the closest counterpart of such rate as shall be designated by the Superintendent of Banks of the State of California unless some other person or agency is delegated such authority by the Legislature).
- statuteCal. Const. art. XV, § 1enactment date not established
The words that state the rule
No person, association, copartnership or corporation shall by charging any fee, bonus, commission, discount or other compensation receive from a borrower more than the interest authorized by this section upon any loan or forbearance of any money, goods or things in action. However, none of the above restrictions shall apply to any obligations of, loans made by, or forbearances of, any building and loan association as defined in and which is operated under that certain act known as the “Building and Loan Association Act,” approved May 5, 1931, as amended, or to any corporation incorporated in the manner prescribed in and operating under that certain act entitled “An act defining industrial loan companies, providing for their incorporation, powers and supervision,” approved May 18, 1917, as amended, or any corporation incorporated in the manner prescribed in and operating under that certain act entitled “An act defining credit unions, providing for their incorporation, powers, management and supervision,” approved March 31, 1927, as amended or any duly licensed pawnbroker or personal property broker, or any loans made or arranged by any person licensed as a real estate broker by the State of California and secured in whole or in part by liens on real property, or any bank as defined in and operating under that certain act known as the “Bank Act,” approved March 1, 1909, as amended, or any bank created and operating under and pursuant to any laws of this State or of the United States of America or any nonprofit cooperative association organized under Chapter 1 (commencing with Section 54001) of Division 20 of the Food and Agricultural Code in loaning or advancing money in connection with any activity mentioned in said title or any corporation, association, syndicate, joint stock company, or partnership engaged exclusively in the business of marketing agricultural, horticultural, viticultural, dairy, live stock, poultry and bee products on a cooperative nonprofit basis in loaning or advancing money to the members thereof or in connection with any such business or any corporation securing money or credit from any federal intermediate credit bank, organized and existing pursuant to the provisions of an act of Congress entitled “Agricultural Credits Act of 1923,” as amended in loaning or advancing credit so secured, or any other class of persons authorized by statute, or to any successor in interest to any loan or forbearance exempted under this article, nor shall any such charge of any said exempted classes of persons be considered in any action or for any purpose as increasing or affecting or as connected with the rate of interest hereinbefore fixed. The Legislature may from time to time prescribe the maximum rate per annum of, or provide for the supervision, or the filing of a schedule of, or in any manner fix, regulate or limit, the fees, bonuses, commissions, discounts or other compensation which all or any of the said exempted classes of persons may charge or receive from a borrower in connection with any loan or forbearance of any money, goods or things in action. The rate of interest upon a judgment rendered in any court of this State shall be set by the Legislature at not more than 10 percent per annum. Such rate may be variable and based upon interest rates charged by federal agencies or economic indicators, or both. In the absence of the setting of such rate by the Legislature, the rate of interest on any judgment rendered in any court of the State shall be 7 percent per annum. The provisions of this section shall supersede all provisions of this Constitution and laws enacted thereunder in conflict therewith.
- statuteCal. Civ. Code § 1916.1enactment date not established
The words that state the rule
The term “made or arranged” includes any loan, or any forbearance, extension, or modification of a loan, made by a person licensed as a real estate broker as a principal or as an agent for others, and whether or not the person is acting within the course and scope of such license.
- statuteCal. Civ. Code § 1916.1enactment date not established
The words that state the rule
For purposes of this section, a loan, or forbearance, extension, or modification of a loan, is arranged by a person licensed as a real estate broker when a broker (1) acts for compensation or in expectation of compensation for soliciting, negotiating, or arranging the loan, or forbearance, extension, or modification of the loan, for another, (2) acts for compensation or in expectation of compensation for selling, buying, leasing, exchanging, or negotiating the sale, purchase, lease, or exchange of real property or a business for another and (A) arranges a loan to pay all or any portion of the purchase price of, or of an improvement to, that property or business or (B) arranges a forbearance, extension, modification, or refinancing of any loan in connection with that sale, purchase, lease, exchange of, or an improvement to, real property or a business, or (3) arranges or negotiates for another a forbearance, extension, modification, or refinancing of any loan secured by real property in connection with a past transaction in which a broker had acted for compensation or in expectation of compensation for selling, buying, leasing, exchanging, or negotiating the sale, purchase, lease, or exchange of real property or a business.
The words that state the rule
The element of intent is narrow. “[T]he intent sufficient to support the judgment [of usury] does not require a conscious attempt, with knowledge of the law, to evade it. The conscious and voluntary taking of more than the legal rate of interest constitutes usury and the only intent necessary on the part of the lender is to take the amount of interest which he receives; if that amount is more than the law allows, the offense is complete.” (Thomas v. Hunt Mfg. Co. (1954) 42 Cal.2d 734, 740 [ 269 P.2d 12 ].) Intent is relevant, however, in determining the true purpose of the transaction in question because “. . . the trier of fact must look to the substance of the transaction rather than to its form. . . . ‘[I]t is for the trier of the fact to determine whether the intent of the contracting parties was that disclosed by the form adopted, or whether such form was a mere sham and subterfuge to cover up a usurious transaction.’ ”
The words that state the rule
As we shall explain, we hold the usury law does not apply to this debt restructuring because there was no loan or forbearance, the prerequisite to application of the usury law. The transaction was a modification of a credit sale that was not subject to the usury proscription. The modification retained the exemption.
The words that state the rule
Disposition The judgment of the Court of Appeal is reversed. This matter is remanded to the Court of Appeal for further proceedings consistent with this opinion.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.