Most of the information below was gathered from an interview we did with Nema Daghbandan, Partner at Geraci Law Firm, while attending a California Mortgage Association conference in October 2021. Nema is an expert in compliance for private mortgage lenders throughout the United States. Visit Geraci’s profile on our Service Provider Directory to learn more about their services.
What is California’s Usury Law?
Article 15 of the California Constitution states that the maximum interest for a loan secured by real property is 10% per year. The 10% is an annual percentage rate (APR), which includes all the fees charged to the borrower, not just the interest rate. What’s really interesting about California’s usury law is that it only applies to unlicensed lenders. Any loan that is arranged by a lender or broker licensed by the State of California is exempt from usury.
Licensed Entities Exempt from Usury
There are two types of licenses for mortgage lending in California. If you fund or broker a private mortgage for a property in California under one of these two licenses, the loan is exempt from usury.
Real Estate Broker License
The California Real Estate Broker license is regulated by the California Department of Real Estate (DRE). It’s mostly used by lending companies that have the loans funded by private party individual investors. Private mortgage loans originated by lenders and brokers that have an active DRE license are exempt from usury in California.
California Finance Lender License
The California Finance Lender (CFL) license is regulated by the Department of Financial Protection & Innovation (DFPI). This is mostly used by private lending companies that lend from their balance sheet. Most mortgage fund managers use this license, as well as lenders that sell loans to the secondary market. Private mortgages funded by lenders that have an active CFL license are exempt from usury in California.
Some private lending companies have both a California DRE and CFL license.
Lending in California Without a License
Lenders and Individual Investors who don’t have an active California DRE or CFL license should consider working with a licensed broker to arrange/originate the loan in order to get their loan exempt from usury.
A non-licensed lender may arrange their own loan directly to a borrower for real property in California, but it would be subject to the state’s usury law. So the maximum annual percentage rate cannot exceed 10%. Also, an unlicensed lender may only arrange one private mortgage per calendar year. This is not part of the usury law, but this rule falls under another regulation and statute.
Usury Triggers for Note Investors
Many private mortgages in California are arranged by a licensed broker/lender but funded by a note investor. Some are sold to a note investor after closing. These note investors, if not licensed, should be cautious about making any changes to the loan during the loan term, because the changes could trigger the usury law to take effect. Below are a few examples.
- Provide the Borrower with additional funds, causing the loan amount to increase
- Extending the loan and charging an extension fee
- Renewing the loan
All of these events would cause the loan to be subject to usury. If a note investor decides to take any of these actions, they must make sure the total APR is less than 10%.
Find Private Mortgage Attorneys
If you’re a lender seeking legal assistance with a usury case in California or any other state, use our website as a resource. Our Service Provider Directory has a list of law firms that serve private money and hard money lenders throughout the United States.
- Click Services in the main menu to access our Service Provider directory
- Click Legal
- Look for the Filters section, click Compliance
- View each law firm’s profile to learn about their services
- Click the green CONTACT button and reach out to the company directly
The companies listed pay us a monthly advertising fee, so there is no cost to make contact through our website. Please remind each company that you found them on PrivateLenderLink.com.