Every week, Anthony Geraci of Geraci LLP will dissect and create a guide for each state’s private lending laws to be used as the definitive guide for private lenders who lend in California. Anthony Geraci’s depth of experience will guide you through each’s state’s web of laws and sprinkle in practical advice every private lender will want to know. While it is impossible to put everything into one article, Anthony Geraci does his best to guide private lenders in each state’s area of law.
California Private Lending Law: A 30,000 Foot View
California’s private lending law is both robust, and at the same time, with careful planning, easily complied with. While it’s true California boasts a low usury rate of approximately 10%[1], there are enough usury exemptions to drive trucks through it.[2] If you only do business loans (business purpose secured by owner-occupied residential property, okay), then California’s laws are a breeze. For the unsuspecting, though, they could be expensive traps. My goal here is to point those out and help you comply, while also making loans.
Business Purpose Loans
California’s lending laws are complex, but for the most part, they do not apply to business-purpose loans. Business purpose loans are loans that are not for a family, household or personal use. Getting this right can NOT be overstated – do not make consumer loans look like a business purpose loan. California has several laws regarding consumer loans, discussed below. Practical Tip: If you make business-purpose loans, ensure you’ve got the entire business purpose lined up: a business purpose certificate, a business account escrow will wire into, and a well-documented business purpose for your loan to protect you.
Commercial Loans: Usury Still Applies
As noted in our California usury article, even commercial loans must comply with California’s usury law.
Licensing
Because licensed lenders are exempt from usury, licensing is common. If you can get below usury and don’t want to be licensed, then it’s still technically possible, but improbable. In short, you can make one loan per year unlicensed.[3] That is assuming that the loan wasn’t brokered by a California Real Estate broker.[4] If it were, then any loans made or arranged by a California Real Estate Broker are exempt from licensing.
Consumer Loans in California: If It Were Easy, Everyone Would Do It
California has one of the most aggressive frameworks of laws for consumer lending. Just because it’s difficult, however, doesn’t mean you shouldn’t do it. Let’s walk through compliance. Practical Tip: We will discuss federal consumer lending laws in conjunction with the state’s laws.
Consumer Lending Laws: A Framework
California has an extremely sophisticated framework for lending laws, and they’re not all in one place. Depending on the license used to originate the loan, either California Business & Professions Code 10000 (Real Estate Broker) or California Finance Code 22000 (California Finance Lender) applies. In addition, various lending laws can be found in the Financial Code and Civil Code, further expanding the areas where you need to review.
Federal Laws: The Floor, Not The Ceiling
The Federal Truth-in-Lending Act (“TILA”), as well as the Real Estate Settlement Practices Act (“RESPA”), provide the framework for the minimum standards in lending to consumers. With any complex area of law, there are many twists and turns, but, generally speaking, these laws protect consumers to give them the minimum disclosures the government believes will let them compare different loan products and make the best decision.
Truth-in-Lending Disclosures (and Prohibitions)
TILA requires lenders to provide certain disclosures to borrowers to disclose the amount financed, any finance charges, costs incurred to obtain the loan, and significant, material terms of the loan.[5] The goal of TILA is to ensure that borrowers are not surprised by terms they consider important. Depending on the interest rate and finance charges charged to the Borrower, additional restrictions and prohibitions could apply.[6] Some general prohibitions for high cost loans include: (a) balloon payment prohibitions unless it is a true bridge loan; (b) financing of points and fees into the loan; (c) late fees capped to 15 days and 4% of the missed payment amount, (d) and the lender must consider the borrower’s ability to repay the loan in making the loan.
Stiff penalties attach to violating TILA, including a $4,000 fine per violation and the requirement to pay the Borrower’s attorneys’ fees.
California Finance Code 4970 – Covered Loans
Borrowers in California who secure their consumer loans with their owner-occupied dwelling are further protected by California’s high-cost laws, AKA covered loans. Heavy restrictions on prepay penalties, advanced interest, prohibition on negatively amortized loans, and a hard setting of the borrower’s ability to repay limit the Lender’s ability to lend to borrowers.[7]
Geraci’s Word on Consumer Lending in California – Good Intentioned, but Draconian
While good-intentioned, these laws limit Borrowers’ ability to tap into their home equity, an asset that most people who have a need to borrow will have. Thus, Borrowers who have an absolute need to tap into their home equity literally only have one avenue: sell their home to release the stored equity within. In this way, the Borrower loses their home because of their inability to get a loan on their property.
Conclusion
California has many laws that protect borrowers, and savvy private lenders will navigate these choppy waters carefully when lending in California. Due to its complexity, it may scare away some private lending, but overall, California is a competitive market, and many lenders find ways to comply.
If you need help with licensing, compliance, or advice regarding California private lending, give us a call.
[1] Technically the greater of 10% or 5% above the federal funds rate.
[2] See Anthony Geraci of Geraci LLP’s article here about California Usury Law: https://geracillp.com/the-private-lenders-ultimate-guide-to-usury-in-california/
[3] See Cal. Fin Code § 22050.5.
[4] California is odd in that the Real Estate Broker’s license covers for both mortgages and real estate.
[5] 12 CFR §§ 1026.5, 1026.17
[6] 12 CFR §§ 1026.32-1026.35 (high cost mortgages and higher cost mortgages).
[7] Cal. Fin. Code § 4973
