Get Professional Help When Lending Money

Print
By PETER ROSENTHAL, President
V.I.P. Trust Deed Company

In a previous article I touched many a sore spot by discussing loans made to friends and relatives.  We have all “been there, done that” and, unfortunately, many of us will be asked to do so again.

This column assumes that you have agreed to lend a sum of money to a private individual secured by a deed of trust.  I am also assuming that you are not a sophisticated lender and not a real estate broker or using a real estate broker or attorney to help in arranging the loan.  The reason for these assumptions is the word “usury.”

The usury statutes are alive and well in California and can bite an unwary lender harder than a junkyard dog.  Certain classes of lenders are exempt from the usury statutes, including real estate brokers.  Certain types of loans, including seller carryback, are also exempt.  I have heard that real estate brokers are “licensed to steal” because in most cases they are exempt from the usury statutes.  My typical reply is, “You are absolutely correct, but the major emphasis is on the word licensed.”  A real estate broker engaged in the mortgage or trust deed business is expected to know all the paperwork involved, including lender’s disclosures, borrower’s disclosures, applicable RESPA statutes, 3 day rights of rescission, annual percentage rate disclosures (APR), etc.  The typical private lender knows nothing about this and, left to run amuck, will definitely get the borrower and themselves in serious trouble.

Many of you will totally disbelieve me when I tell you that a private party cannot legally lend money to a friend, relative, private party or even a business (as I write this article) at the typical 11-15% unless they are somehow shielded from the usury statutes.  I will not belabor usury further other than to tell you that the usury ceiling is a sliding scale that basically covers a loan of money or the forbearance thereof at a rate in excess of the federal discount rate (on the 25th of the month preceding the transaction) plus 5 per cent.  For personal purposes the actual ceiling is 10%.

Worse, the penalties for usury could “theoretically” be criminal.  If done inadvertently there are civil penalties that would involve the loss of ALL INTEREST and, more importantly, the borrower’s attorney’s fees and costs.
Do not panic!  Many loans are exempt from usury.  The purpose of this article is to advise you to seek professional help when arranging a loan in excess of a few hundred dollars.

In arranging a loan, particularly ones secured by deed of trust, there are many intricacies that need to be thought through, including late fees, prepayment penalties, due on sale clauses, etc.  These are not something that should be done on the spur of the moment with a form purchased at a stationery store.  This is only intended to be a wake-up call to warn against accidental abuses that I see every day in my practice.   Well meaning people make 11, 12, or 13% loans every day to people or entities throughout this state that are often usurious.  When making a loan, keep this column in mind and check with an attorney or broker engaged in the lending business to verify that your proposed loan does not run afoul of the myriad of state and federal laws.   A late fee that “sounded good,” like a 10% penalty if the payment is more than five days late or a penalty of $20 per day for each day late fee will surely cause later grief.

Have I ruined your day?  Relax.  As I write this column, the sun is shining and the weather is beautiful.  You might accidentally possess a note that is clearly usurious, however have no fear.  If those terms were agreed to (however naively) and the loan is paid off on those terms, you only need to worry about this column “next time.”  The usury aspect generally surfaces when the borrower is unable or unwilling to make payments and goes to a professional to seek advise.

The odds are that your nephew or neighbor will not want to “sue you.”   Just be careful next time.

Peter Rosenthal
VIP Trust Deed Company