Understanding California usury law is critical for any private lender operating in the state. A common misconception among lenders and brokers is that any interest rate on a business purpose loan is permissible. While exemptions exist, there’s no one-size-fits-all approach to interest rates and default interest. California enforces strict penalties for usurious loans, so lenders must understand how to address potential issues before they arise.
What Is Usury?
Usury is the act of lending money at an interest rate that’s either unreasonably high or exceeds what the law permits. The concept dates back centuries—it appears in ancient legal codes and religious texts. As soon as lending became common practice, lawmakers established limits to prevent exploitation through excessive interest charges.
In California, usury law sets a maximum permissible interest rate. If you exceed that rate without qualifying for an exemption, you have a usury problem—with serious consequences.
California’s Constitutional Usury Cap
California’s usury restrictions are enshrined in Article XV of the State Constitution—not just statutory law. For business purpose loans, the maximum interest rate is the greater of:
- 10% per year, OR
- 5% per year plus the prevailing rate established by the Federal Reserve Bank of San Francisco
What Counts Toward the Usury Calculation?
In California, the usury analysis includes:
- Interest rate on the note
- Points going to the lender or broker
The combination of these elements cannot exceed the maximum permissible rate without an exemption.
- Default interest rates
- Late charges
This simplifies calculations compared to states that factor these elements into the analysis.
Key Exemptions from California Usury Law
Several exemptions allow lenders to charge rates above 10%:
1. Licensed California Finance Lenders (CFL)
CFL licensees are fully exempt from usury restrictions. They can charge interest rates and points exceeding the constitutional cap.
2. Loans Arranged by Licensed DRE Brokers
Loans arranged by licensed California Department of Real Estate brokers are exempt. Critical requirement: The broker must actually perform brokerage services—not simply be listed on documents. They must arrange the loan between parties and receive compensation for their services.
3. Seller-Financed Loans
When a property seller carries back financing for the buyer, this is treated as a sales price adjustment rather than a loan, making it exempt from usury rules.
4. Loans to Certain California Corporate Entities
Loans to California LLCs, corporations, or partnerships may be exempt if:
- The entity is organized in California (not Nevada, Delaware, etc.)
- The entity has more than $2 million in assets, OR the loan exceeds $300,000
- Both parties can protect their own interests
- The loan is for business purposes
- No personal guarantee from any individual, revocable trust, or partnership
This exemption is complex—consult counsel before relying on it.
5. Other Exemptions
- Time payment agreements
- Credit cards
- Licensed pawnbrokers (up to approximately 24%)
Setting Your Interest Rate
- 8% interest + 2 points = 10% (compliant)
- 10% interest + 0 points = 10% (compliant)
- 9% interest + 2 points = 11% (USURIOUS)
Default Interest: Exempt but Not Unlimited
Default interest is exempt from the 10% usury cap in California. However, courts apply the doctrine of unconscionability to excessive default rates. If a default rate is so high that enforcing it would be unfair, courts may refuse to uphold it.
- 4-6 percentage points above the note rate, OR
- 18% (a common industry standard)
There’s no bright-line rule, but staying within these ranges helps avoid unconscionability challenges.
Consequences of Usurious Loans
Because California usury is constitutional (not just statutory), penalties are severe:
Void Loan
A usurious loan is void as a matter of law—not voidable. You cannot enforce it, foreclose, or collect under its terms. The loan simply does not exist as a valid contract.
Cannot Be Waived by General Release
A 2018 California case (Hathaway) held that general release provisions don’t waive usury claims. To release usury claims, the release must specifically reference usury.
Treble Damages
Intentional usury violations can result in triple damages. This requires showing the lender knew about usury laws and chose to violate them anyway—difficult to prove but possible.
Remedies and Defenses
Usury Savings Clauses
Include usury savings clauses in loan documents. These provisions instruct courts to rewrite terms to comply with usury limits if a violation is found.
Statute of Limitations
The statute of limitations for usury claims is two years from the last payment. Be cautious of unexpected payments near this deadline—they may be attempts to restart the limitations period.
Unjust Enrichment
Even if the loan is void, you may recover under unjust enrichment—the borrower received value and shouldn’t retain it without compensation.
Forbearance and Modification
If you discover a usury problem, a forbearance agreement or modification can help. Amend the interest rate to comply with limits and include a specific release of usury claims. Borrowers in default are often willing to sign nearly anything to continue the relationship.
Common Questions
Do extension fees count toward usury?
If negotiated at origination with a licensed broker: Generally exempt. If negotiated later without a broker: Potentially usurious if the fee pushes total compensation above 10%.
What about short-term bridge loans?
Short-term loans are not exempt simply because they’re short. A 2% monthly rate (24% annual) without an exemption is usurious.
What must a broker do to qualify as “arranging” the loan?
At minimum, the broker must interview the borrower and order loan documents. The broker must be involved in the transaction—not just listed on paper—and must receive compensation.
Best Practices for California Lenders
1. Know your exemption status before setting rates 2. Use licensed brokers for any loan where you want to exceed 10% 3. Document broker involvement thoroughly 4. Include usury savings clauses in all loan documents 5. Set reasonable default rates (18% or note rate plus 4-6%) 6. Consult counsel before relying on the corporate borrower exemption 7. Get specific usury releases in any settlement or modification
How Geraci LLP Can Help
California usury law creates significant risk for non-compliant lenders. The Geraci LLP Banking & Finance team helps private lenders structure loans, navigate exemptions, and address compliance issues. Whether you need loan document preparation, compliance advice, or help cleaning up a potentially usurious loan, contact our team for guidance tailored to your situation.
