For private lenders operating in California, loan modifications and forbearance agreements have become a legal minefield following the Ninth Circuit Court of Appeals’ decision in In re Moon. The ruling has fundamentally altered how lenders must approach workout strategies for broker-arranged loans, and failing to understand its implications can transform a properly originated loan into a usury violation overnight.
This article breaks down the In re Moon decision, its impact on private lending in California, and the practical steps lenders should take to protect themselves in 2025 and beyond.
The Broker Exemption Under California Civil Code Section 1916.1
California imposes a usury limit of 10% per year on interest rates, which includes origination fees and other charges. However, California Civil Code Section 1916.1 provides a critical exemption: loans arranged by a licensed real estate broker are not subject to the usury cap. This exemption has been a cornerstone of the private lending industry in California, as many private lenders are not independently licensed and instead rely on licensed brokers to arrange their loans.
For years, the industry operated under the assumption that a loan originating with a valid broker exemption would retain that exemption through subsequent modifications and forbearance agreements. That assumption was upended by a bankruptcy court ruling in January 2022 and ultimately confirmed by the Ninth Circuit in 2024.
The Facts of In re Moon
The lender, Milestone Financial, originated a loan to the borrowers (the Moons) at an interest rate of 11.3%. Because the loan was arranged by a licensed real estate broker, it qualified for the Section 1916.1 usury exemption at origination. When the borrowers experienced payment difficulties, the parties entered into a settlement agreement that extended the loan’s maturity date and actually reduced the interest rate to 11.05%, still above the 10% usury threshold but lower than the original rate.
Critically, no licensed real estate broker was involved in negotiating this settlement agreement. When the borrowers continued to struggle with payments, the lender initiated foreclosure proceedings. The borrowers filed a bankruptcy petition, and the dispute landed in bankruptcy court.
The Bankruptcy Court’s Narrow Interpretation
The bankruptcy court concluded that the settlement agreement was effectively a loan modification or forbearance. Under the court’s reading of Section 1916.1, the usury exemption applies only when a licensed broker arranges the loan, and the statute’s language further requires that the broker must be the same broker who arranged the purchase or exchange of the underlying property.
This interpretation meant that even though the original loan was properly exempt, the modification stripped away that exemption because no broker, let alone the specific broker who arranged the property purchase, was involved in the forbearance agreement. The loan, despite carrying a lower interest rate than at origination, was deemed usurious.
The Ninth Circuit Affirms
After the initial bankruptcy court ruling was upheld on first appeal, the case reached the Ninth Circuit Court of Appeals. Geraci LLP, serving as general counsel for the American Association of Private Lenders (AAPL), filed an amicus curiae brief arguing for a broader, practical interpretation of the statute that aligned with legislative intent and industry practice.
The AAPL brief emphasized that Section 1916.1 was enacted to foster lending growth in California by ensuring borrowers had access to a wide range of loan products with flexible terms. The involvement of a licensed broker in the transaction was meant to protect borrowers from predatory practices, regardless of whether that broker also handled the underlying real estate purchase.
Despite these arguments, the Ninth Circuit ruled in its April 2024 decision to uphold the lower courts’ interpretation. The court found that the statutory language, however poorly drafted, supported the narrow reading that the modification caused the lender to lose its usury exemption.
Practical Consequences for Private Lenders
The In re Moon decision creates several immediate and ongoing challenges for private lenders in California:
Modifications May Be Impossible for Unlicensed Lenders
Unless the lender holds a California Finance Lender (CFL) license, any loan modification or forbearance on a broker-arranged loan with an interest rate above 10% may constitute a usury violation, even if the modification reduces the interest rate. This effectively eliminates one of the most common workout tools available to lenders when borrowers experience financial difficulty.
Increased Licensing Pressure
Lenders who regularly originate loans in California now face stronger incentives to obtain their own CFL license rather than relying solely on the broker exemption. A CFL license provides an independent basis for the usury exemption that is not subject to the same restrictions as the broker-arranged exemption under Section 1916.1.
Legislative Fix Remains the Long-Term Solution
The statute’s language is widely regarded within the industry as poorly drafted, creating an outcome that the legislature likely did not intend. In practice, real estate brokers who arrange financing are rarely the same brokers who handle property purchases. The distinction embedded in Section 1916.1 reflects an arbitrary requirement that does not serve any meaningful borrower protection purpose.
Industry groups, including AAPL, continue to advocate for a legislative amendment that would clarify that broker-arranged loans retain their usury exemption through subsequent modifications, provided that borrower protections remain intact.
Steps Lenders Should Take Now
1. Evaluate your licensing status. If you regularly lend in California at rates above 10%, consider whether obtaining a CFL license is appropriate for your business model.
2. Review existing loan portfolios. Identify any broker-arranged loans in California that may be subject to modification or forbearance requests, and assess whether the current interest rate exceeds the usury threshold.
3. Consult legal counsel before entering into any modification. The consequences of an unintentional usury violation can include forfeiture of all interest, treble damages, and other penalties under California law.
4. Structure new loans with the Moon decision in mind. When originating new broker-arranged loans in California, consider whether the loan terms and structure provide adequate flexibility in the event that a workout becomes necessary.
5. Monitor legislative developments. A statutory fix remains the most effective long-term solution, and lenders should stay informed about any proposed amendments to Section 1916.1.
Protect Your California Lending Operations
The In re Moon decision underscores why private lenders operating in California need experienced legal counsel who understand the nuances of state-specific lending regulations. Geraci LLP attorneys have been at the forefront of this issue, advocating on behalf of the private lending industry before the Ninth Circuit and working with industry organizations to pursue a legislative solution.
If you are a lender who originates, services, or modifies loans in California, contact Geraci LLP today to discuss how the In re Moon ruling may affect your business and what steps you can take to mitigate your exposure.
Geraci LLP | (949) 403-3488 | 90 Discovery, Irvine, CA 92618
