California usury laws will generally grant little protection to borrowers and not inconvenience lenders too much. In most situations, the lender is either partially or completely exempt. However, in some situations a lender can land themselves in serious hot water by violating these laws. This is why having a good understanding of California usury law is essential.
General Explanation of California Usury Law
Basic usury laws in California are in the state Constitution at Article 15. For consumer loans, the parties may contract for interest on a loan primarily for personal, family or household purposes at a rate not exceeding ten percent (10%) per year. A loan to be used primarily for the purchase, construction or improvement of real property is not regarded as a loan for personal, family or household purposes.
For all other loans, the allowable rate is the higher of (a) ten percent (10%); or (b) five percent (5%) over the amount charged by the Federal Reserve Bank of San Francisco on advances to member banks on the twenty-fifth day of the month before origination of the loan. As of October 1, 2009 the applicable Federal Reserve Bank rate was 0.50 percent, meaning that any non-exempt loan bearing interest at greater than ten percent (10%) would be usurious.
It’s also important to note that maximum interest rates refer to the simple interest rate on the unpaid balance.
An individual or organization found to have originated a usurious loan in California is subject to penalties including:
- payment to the borrower of triple the amount of interest collected in the year before the borrower brings suit
- forfeiture to the borrower on all interest on the loan, even if the entire loan wasn’t usurious
An individual who knowingly accepts interest on a usurious loan is guilty of loan sharking. Loan sharking is a felony punishable by imprisonment for up to 5 years. Loan sharking is a rare conviction, but it can happen.
Statute of Limitations
The statute of limitations for recovering interest paid on a usurious loan is two years. Only interest paid during that two year period is recoverable.
Some exceptions include:
- in the event the lender sues to enforce a usurious loan contract, the borrower may assert a usury cross-complaint for all the interest paid on the loan as an offset without regard to the statute of limitations
- if the statute does not begin in some cases until after the borrower repays the loan
California affords lenders many opportunities to escape falling under the guidelines of usury law.
Evidences of indebtedness such as promissory notes or bonds can be used as exemptions. In order to qualify for these exemptions, neither the borrower nor a guarantor of the indebtedness may be an individual, the lender must have a preexisting relationship with the borrower or guarantor or reasonably appear to the borrower to have the capacity to protect its own interests in the transaction, and the loan must not be primarily for personal, family or household purposes.
There are also exemptions for certain licensed lenders, such as loans made or arranged by a California-licensed real estate broker and secured in whole or in part by a lien on a real property. This is regardless of whether the real estate broker was acting in that capacity.
Another example is for loans made by financial institutions and insurance companies. Institutions including savings and loan associations, banks, and credit unions simply are exempt from usury laws. The California Financial Code applies this exemption under most cases for these types of organizations.
Contact Webb Law Group
Got a question about California usury law? Reach out to our offices today!
Webb Law Group is a reputable business law firm with experience in matters involving California law, including usury law cases. Having a reputable attorney by your side for these matters will help give you the best possible chance of a positive outcome in your case. If you feel you need legal representation, we are happy to review your legal needs and provide consultation and support where necessary.
For questions, or to schedule a consultation, contact us today at (559) 431-4888 (Fresno) or (619) 399-7700 (San Diego).