Usury law is the compliance topic private lenders most often misunderstand and most often regret misunderstanding. Charge an interest rate above what state law allows — even by a small margin, even unintentionally — and the consequences range from refunding excess interest to forfeiting all interest, voiding the right to recover principal, or, in rare cases, criminal liability. The exposure does not depend on the lender’s intent. It depends on whether the math, the structure, and the documentation line up with the applicable rate cap and exemptions.
For lenders who fund California real estate, California’s framework is the practical center of gravity — the cap is constitutional, the case law is broad, and the penalties are severe. But because most modern private lending platforms operate across multiple states, California has to be understood inside a broader multi-state framework. This guide does both: a deep dive into California’s regime, set against the structural patterns that govern usury exposure in every other state.
How Usury Statutes Are Actually Structured
Roughly half of U.S. states impose some form of interest-rate cap that can apply to business-purpose lending. The other half functionally exempt commercial transactions through statutory carve-outs or by simply having no cap at all. Within the states that do regulate, the practical reach of the law usually depends on a layered set of variables:
- Loan amount. Many states exempt loans above a stated dollar threshold. Below the threshold, caps apply; above it, they often do not.
- Borrower type. Whether the borrower is a natural person, a corporation, an LLC, or a limited partnership often shifts the analysis. Entity borrowers are routinely treated more permissively than individuals.
- Property classification. Residential vs. commercial, and within residential, owner-occupied vs. investment.
- Lien priority. First-position loans and junior-lien loans are sometimes treated differently.
- Use of proceeds. Business purpose vs. consumer purpose drives the entire framework. Consumer loans tend to face tighter caps and narrower exemption pathways.
- Combinations. Many states stack two or three of these variables — a usury cap may apply only to junior-lien loans below a dollar threshold made to natural persons on owner-occupied property, for example.
The practical effect is a patchwork in which the same rate may be lawful in one state, marginally compliant in a second, and clearly usurious in a third — for loans with otherwise nearly identical characteristics. A lending platform that serves multiple states needs a state-by-state matrix, not a one-size-fits-all term sheet.
California: The Constitutional Cap
California is unusual because the rate cap lives in the state constitution, not in a statute. Article XV, Section 1 of the California Constitution sets the limit:
- Loans for personal, family, or household purposes: capped at 10 percent per annum.
- Loans for any other purpose (business, investment, commercial): the greater of 10 percent per annum, or 5 percent above the discount rate of the Federal Reserve Bank of San Francisco on the 25th day of the month preceding the earlier of the loan’s date of execution or the date the loan is funded.
The practical rule of thumb: a non-exempt California lender cannot charge more than 10 percent annually. Anything above that has to be supported by a recognized exemption, not by the parties’ agreement. California will not enforce a borrower’s contractual waiver of usury — the protection is constitutional and non-waivable.
“Interest” Means More Than the Number on the Note
California courts have read the term “interest” expansively for decades. Anything of value the lender receives from the borrower in connection with the loan is treated as interest, regardless of how the parties label it. That includes:
- Origination points
- Underwriting and processing fees
- Commitment, lock, and rate-buydown fees
- Exit fees and prepayment premiums
- Bonus payments tied to performance milestones
- Equity kickers and profit participations (in many cases)
This expansive definition is one of the most common compliance traps, and not just in California. Most usury-active states treat lender fees as interest, which produces surprising results on shorter-term deals. Consider a $100,000 loan at a 12 percent stated rate with a 2 percent origination fee:
- On a 12-month term, the all-in rate is roughly 14 percent (12 percent note rate plus 2 percent origination spread over the year).
- On a 6-month term, the same 2 percent origination fee annualizes to a 4 percent rate impact, pushing the all-in to roughly 16 percent.
- On a 3-month bridge, the same fee annualizes higher still.
For lenders running short-term bridge product with multiple fee components, the compounding effect can push a loan above a state’s cap even when the stated note rate looks comfortably compliant. Every fee charged to the borrower has to be analyzed through the applicable usury calculation — including default-stage charges like late fees, default interest, and modification fees, which can drift a clean origination into usurious territory during a workout.
What Happens When a California Loan Is Usurious
A few features of California usury law make it particularly dangerous for unwary lenders:
- Strict liability. The lender’s intent is irrelevant. A borrower who drafts the note herself and proposes the usurious rate can still pursue the lender for the violation. “I didn’t know” is not a defense.
- Cumulative remedies. The borrower may recover (1) all interest paid in the two years preceding suit, (2) treble damages on interest paid in the twelve months preceding suit, (3) elimination of all future interest on the loan, and (4) punitive damages where the conduct is found to be oppressive, fraudulent, or malicious.
- The economic effect. A usurious loan can convert to an interest-free loan, with the lender owing damages on top. The lender has lent money for free and paid the borrower for the privilege.
- Criminal exposure. Willful violations can be charged as loansharking and may also support a Business and Professions Code § 17200 unfair competition claim.
There is one limited reformation pathway. California appellate courts have allowed parties, by mutual agreement and with full knowledge of the original note’s noncompliance, to enter into a new agreement that removes the usurious terms and credits the borrower for any excess interest paid. This is a remediation tool, not a planning tool, and executing it properly requires real care.
Across other states, the penalty menu is similar in structure if not in severity:
- Refund of excess interest — the mildest penalty, present in most jurisdictions.
- Multiplied damages — double or triple the usurious amount.
- Forfeiture of all interest — the lender keeps principal but loses every dollar of interest collected or due.
- Loss of principal — in extreme cases, courts may void the lender’s right to recover principal at all.
- Criminal sanctions — rare but real in certain states.
The severity of the penalty in any given state should drive the level of compliance scrutiny. The states with the harshest remedies (California, Montana) deserve the closest pre-funding analysis.
How California’s Exemptions Actually Work
The 10 percent constitutional cap exists alongside a long list of exemptions. The exemptions are how virtually every functioning private lending program in California operates above 10 percent. The ones that drive most private lending:
- Loans made or arranged by a licensed California real estate broker. Where the broker is acting in that capacity and the loan is secured by real property, the loan is exempt from the constitutional cap. This is the workhorse exemption for non-bank California lenders. The broker’s involvement has to be genuine and properly documented; merely listing a broker on the file is not enough.
- California Finance Lender (CFL) license holders. A CFL-licensed lender is exempt from the constitutional cap on loans made under that license. For lenders willing to obtain and maintain the license, this is a clean structural answer.
- Other licensed lending entities. Banks, credit unions, and certain other licensed institutions are similarly exempt.
- Seller financing. A seller carryback secured by a deed of trust on the property being sold is generally exempt.
- Time-payment retail installment contracts and credit cards under the Unruh Act.
- Licensed pawnbrokers, who have their own statutory rate framework.
- Loans to qualified business borrowers. Loans to California corporations with at least $2 million in assets, or loans of more than $300,000 to qualified entities, may be exempt where specific statutory conditions are met.
Each exemption has its own requirements, documentation, and edge cases. The exemption a lender thinks applies on a deal is not always the exemption a court will find applies after the fact.
How Other States Compare
A few representative state frameworks illustrate the multi-state patchwork:
New York
New York’s general civil usury cap is 16 percent, with a criminal usury cap of 25 percent. The applicable rate depends on several variables, including whether the borrower is a corporation, LLC, or limited partnership, and whether the loan amount exceeds certain thresholds. Loans of $2.5 million or more are exempt from New York’s usury statutes entirely, providing a significant safe harbor for larger commercial transactions. New York’s criminal usury statute reaches even sophisticated commercial transactions, so even where the civil cap does not apply, the criminal ceiling can.
Oregon
Oregon’s usury restrictions are narrow in scope. They apply only to loans of $50,000 or less that are secured by a junior lien and were not originated as part of a purchase transaction. For qualifying loans, the cap is the greater of 12 percent or 5 percent above the 90-day commercial paper discount rate. The vast majority of private lending transactions fall outside this narrow window, but lenders making smaller subordinate-lien loans should be aware of the restriction.
Montana
Montana is the cautionary tale. Its 16 percent cap applies broadly and aggressively: origination points, late charges, and default interest are all swept into the usury calculation. Critically, Montana courts will not honor a choice-of-law provision that selects another state’s law to escape Montana’s usury cap. A lender lending into Montana real estate is subject to Montana’s framework regardless of what the loan documents say, and structuring around it is materially harder than in most jurisdictions.
States Without a Meaningful Cap
A handful of states (Delaware and Connecticut historically among them, depending on the loan profile) effectively exempt commercial loans from any rate cap. These jurisdictions are sometimes used as choice-of-law anchors — but only where there is a legitimate connection to the state.
Choice-of-Law: Useful, but Not a Free Pass
Choice-of-law provisions can be a powerful tool for managing usury compliance across state lines. By designating a state with favorable usury law as the governing law of the loan documents, a lender can sometimes avoid the rate cap of the state where the property is located. The mechanics typically work this way: a lender with a meaningful connection to a permissive state (a place of business, a CFL license, a meaningful operations footprint) selects that state’s law as the governing law for a loan secured by property in a stricter state.
The strategy carries real limitations:
- A genuine nexus is required. Courts will not enforce a choice-of-law provision that has no reasonable relationship to the parties or the transaction. Selecting Delaware law just because Delaware has no cap, without any genuine Delaware connection, invites invalidation.
- Some states refuse to honor choice-of-law for usury purposes at all. Montana is the most prominent. A handful of others have similar public-policy carve-outs for usury specifically.
- Borrower domicile and property location matter. When all of the meaningful contacts of a transaction are in the stricter state, courts are more willing to set the choice-of-law provision aside.
- Disclosure expectations may still apply. Even where the choice-of-law clause holds, federal disclosure requirements and certain state consumer protections do not lift simply because a different state’s law was selected.
For California-property loans, the realistic options are usually structuring within a California exemption (broker-arranged or CFL) rather than relying on choice-of-law. The exemptions are well-developed, well-documented, and harder to attack than a creative choice-of-law structure.
The Compliance Discipline That Actually Works
Compliance with usury law isn’t a checkbox — it is an underwriting discipline. The lenders who don’t get caught share a few habits:
1. Identify the exemption (or the safe-harbor structure) before the term sheet. Decide which exemption supports the rate before the deal is priced. If you can’t name it, you don’t have one. 2. Document the exemption inside the loan file. Broker license number and engagement evidence; CFL license documentation; entity documents establishing a qualifying-business exemption; evidence of seller-financing structure — whatever the basis, the file should make the conclusion obvious. 3. Calculate the all-in effective rate. Run an APR-style calculation that captures all points, fees, and charges over the realistic loan life. Confirm the result fits inside the applicable cap or exemption — at origination and at default. 4. Build a state matrix. For multi-state platforms, maintain a written matrix showing each state’s general cap, its exempting variables (loan size, borrower type, lien position, etc.), its treatment of fees, and its position on choice-of-law. 5. Watch the workout file. Late fees, default interest, modification fees, and forbearance fees all have to clear the same usury hurdle as origination. A loan that was clean at funding can drift into usurious territory in a workout. 6. Don’t rely on borrower waivers. California and most other states will not enforce a contractual waiver of usury protections. 7. Track the rate inputs. California’s non-consumer cap floats with the Federal Reserve Bank of San Francisco discount rate. Other states reference different benchmarks. The cap in effect at execution is the cap that applies — but the lender still needs the right number on file.
Where Geraci LLP Comes In
Usury exposure is the kind of compliance issue that produces no problems at all — until a borrower defaults and counsel goes through the file looking for a defense. At that point, what the lender did at origination and during servicing is fixed and unalterable.
Geraci LLP’s banking and finance attorneys work with private lenders, brokers, and mortgage funds on usury structuring, exemption documentation, all-in-rate analysis, broker-of-record arrangements, qualifying-business loan documentation, choice-of-law analysis, and defense of usury claims when they arise. As the largest law firm in the country dedicated to private lending, the firm also produces multi-state licensing and compliance surveys for lenders operating beyond California.
If you are pricing a loan above a state’s usury cap, restructuring an existing loan, evaluating a workout, entering a new state, or facing a usury claim, contact Geraci LLP before the structure is locked in.
