california usury exemption for broker arranged loans

When it comes to lending, usury laws play a crucial role in protecting borrowers from excessive interest rates and fees. In the state of California, there are specific exemptions that apply to broker-arranged loans, which can have significant implications for both lenders and borrowers.

One recent case involving a loan dispute highlights the importance of understanding these exemptions. The Moons took out a business-purpose loan with an original interest rate of 11.3% per annum, but later found themselves unable to refinance due to a pre-payment penalty. They eventually entered into a settlement agreement with their lender, which was intended to modify and extend their existing loan.

However, the court ultimately ruled that this settlement was actually a forbearance, which extended the Moons' time for performance and charged a fee for allowing them to do so. The lender argued that since the original loan involved a broker and was exempt from usury limits, the settlement agreement was also exempt. But the court disagreed.

According to California Civil Code § 1916.1(1), a loan or forbearance is considered 'arranged by a person licensed as a real estate broker' if the broker acts for compensation or in expectation of compensation for soliciting, negotiating, or arranging the loan. In this case, the Moons' original loan was indeed arranged through a licensed broker, which qualified it for the 'broker' exception to California's usury limit of 10%.

The lender, on the other hand, was not licensed as either a broker or a mortgage loan originator. The court ultimately sided with the Moons on all three issues, including the usury issue.

This case serves as an important reminder for lenders and borrowers alike: when it comes to broker-arranged loans in California, it's essential to understand the specific exemptions that apply. By doing so, you can avoid costly legal disputes and ensure compliance with state usury laws.

California usury exemption for broker arranged loans