V.I.P. Trust Deed Company
Every private party reading this article is subject to California USURY laws UNLESS you are one of the exempt lenders as defined by the constitution. This subject is completely misunderstood by most people and when I mention this I am used to receiving blank looks with people, frankly, not believing me.
Usury is basically the loan of money or the forbearance thereof at a rate higher than allowed by the usury statutes. I am not going to make this very complicated, but the allowable interest ceilings are broken into two sections. Loans for personal or household purposes have a maximum interest rate of 10%. All other loans have a floating rate which is expressed as a rate not more than “5% above the federal discount rate on the 25th of the month preceding the transaction.” Please remember as you read through this article that I am talking about every loan in California UNLESS the loan was arranged by an exempt lender. For the sake of this discussion, please assume that banks, finance companies, credit unions and the typical lending institutions ARE EXEMPT. One of the other major exemptions is for real estate brokers ARRANGING LOANS or personal funding loans secured directly or collaterally by real estate.
Now let’s give you the good or bad news, as the case may be. If your brother, friend or acquaintance just lent you $10,000 at 12%, the loan is usurious. If you lend $5,000 to your uncle’s carpet business at 11%, the loan is usurious. At present, the federal discount rate (San Francisco) is LESS THAN 5%. Therefore, at present, neither personal nor business purpose loans can be made at higher than 10% interest. Please again remember I said UNLESS this loan was arranged by an EXEMPT LENDER. While interest rates are extremely low right now, they were rapidly rising in the latter half of the 1970’s. The usury ceiling at that time was a flat 10%. With rising rates, it was virtually impossible for businesses to borrow money from PRIVATE LENDERS at more than 10% without violating the usury law. Private lenders would not lend money at 10% because they could get almost that amount in bonds, certificates of deposit, etc. The state constitution was then amended to allow for a floating rate (other than personal and household purposes) to alleviate this terrible “crunch” on businesses and private party borrowers. Let me give you an example.
Ten years ago (June, 1989), the federal discount rate was 7%. The maximum interest that a NON EXEMPT lender could charge for a personal loan was 10%. The maximum interest that a non-exempt lender could charge for any other loan–even to a corporation–was 12% (7%+5%). Many of you reading this article presently have loans to friends and family members at more than 10%. Many of you have borrowed money from friends and relatives at more than 10%. I am certainly not advocating that you accost your lender waving this article; I am merely trying to make you more knowledgeable on this subject, especially if you are the lender. The penalty for usurious transactions can be quite high. Most notes contain an attorney’s fees provision and a usurious lender might very well suffer the loss of ALL INTEREST and attorney’s fees. Imagine receiving monthly payments on a $50,000 loan, which would equal $37,500 (interest only). After receiving $37,500, imagine expecting your principal balance of $50,000 back, only to be confronted with a lawsuit and have ALL payments ($37,500) credited towards principal. The borrower at that point would owe you only $15,000 and worse than that, the lender would end up paying for BOTH ATTORNEYS.
Usury is a complex subject and this article is intended to be merely an alert. The mere writing of a usurious note is not absolute evidence of a usurious transaction. One of the other elements of usury is the demand for usurious interest. If, for instance, you accidentally wrote a note at 15%, realized the mistake and then modified it to 10% interest or merely collected 10% interest, the problem would probably go away. Certainly this is not a course in how to fix a usurious note.
I am a real estate broker and have already said that real estate brokers and their lenders are exempt on real estate loans. I once in a while hear the expression “you brokers are licensed to STEAL.” Though a private party cannot lend money at 14% on a real estate transaction without a broker, they are shielded if the loan (on real estate) is arranged by a broker. Are we licensed to steal? Yes. However the main emphasis is on the word “license.” All exempt lenders, whether they are commercial banks, savings banks, credit unions, credit card lenders or real estate brokers provide the borrower with tons of paperwork and disclosures explaining the loan (in writing) in detail. The payments, fees, late fees, balloon payment and annual percentage rate are all explained in detail and in many cases the borrower has an absolute three day right to rescind the transaction. Any violation of these stringent state and federal laws can result in fines, penalties, lawsuits and, most of all, loss of the LICENSE. Private party borrowers are therefore protected by law from private party lenders who, frankly, don’t know anything about these disclosures.
The whole purpose of these laws is to protect the borrower who, in a jam, will pay virtually any interest to a private party lender. A borrower whose family member needs an emergency operation will sign a loan at virtually any interest rate due to the medical emergency. The usury law was designed to protect that individual and John Q. Public, who just doesn’t understand that 1.5% per month means 18% per annum and 1.5% per month PLUS loan fees equals an APR of (probably) substantially more than 20% per annum. Most private lenders just don’t have a clue. One of the typical private lender tricks is to arrange, for example, a $10,000 loan at 10% and then actually give the borrower $9,000 or $9,500. This might look good, but just doesn’t work when “push comes to shove.”
Not only are civil penalties stiff with regard to usury, but there are actually criminal penalties for this practice if done repetitively as a business or pattern of conduct. This, of course, is aimed at loan sharking and organized crime. 100% to 300% (per annum) interest is not unusual for the “break your legs” type lenders.
I have indicated that there are many exempt lenders. There are also many exempt TRANSACTIONS. Remember, at the beginning of this article I stated that usury was the “loan of money or forbearance thereof.” The most common exempt loan is the typical real estate transaction with a “seller carry back.” A loan on property carried by the seller is not a “loan of money,” it is merely an extension of credit.
If you feel you are paying a note that is usurious, merely take it to an attorney with a general or real estate practice. Any good attorney knows this area of the law by heart and can advise you accordingly. In the meantime, whether you are a borrower or a lender, let me close this article by giving some good advice plagiarized from the old Hill Street Blues television series: “Let’s be careful out there.”
VIP Trust Deed Company