More than two years have passed since the California First District Court of Appeal issued its ruling in Honchariw v. FJM Private Mortgage Fund, LLC (2022) 83 Cal.App.5th 597, and the decision has reshaped default interest practices across the state’s private lending industry. With the California Supreme Court’s refusal to grant review — and no legislative fix on the horizon — lenders who have not yet adapted their loan documents and servicing protocols are operating with significant legal exposure. This guide breaks down where the law stands today, how the industry has responded, and what private lenders should do going forward.
The Honchariw Decision: A Brief Recap
In September 2022, the First District Court of Appeal reversed an arbitration award that had enforced default interest provisions in a $5.6 million business-purpose bridge loan originated by FJM Private Mortgage Fund. The borrowers, Nicholas and Sharon Honchariw, had missed a single monthly payment of approximately $39,667. Under the loan documents, that missed payment triggered two consequences: a one-time late fee equal to 10% of the overdue installment, and a default interest rate of 9.99% per annum applied to the entire outstanding principal balance.
The appellate court found that charging default interest on the full principal balance following a missed monthly payment constituted an unenforceable penalty under California Civil Code Section 1671. The court’s reasoning centered on proportionality: the lender failed to demonstrate that nearly $560,000 in annualized default interest bore a reasonable relationship to the actual damages anticipated from a single missed installment of under $40,000.
The ruling did not eliminate default interest entirely. It drew a clear distinction between two types of default: a payment default (missing an installment before the loan matures) and a maturity default (failing to repay the loan when the full balance becomes due at the end of the term). Default interest on the entire principal remains permissible following a maturity default. The restriction applies only when a borrower misses periodic payments while the loan is still within its original term.
The Supreme Court’s Denial and What It Means
FJM petitioned the California Supreme Court for review, and multiple industry associations filed amicus briefs supporting that petition. On December 21, 2022, the Supreme Court denied review. The court also denied a separate request to depublish the opinion, meaning the appellate decision remains citable, published authority.
This outcome carries significant weight. While the First District’s ruling is technically binding only within its own jurisdiction — covering counties in the San Francisco Bay Area and parts of Northern California — the Supreme Court’s refusal to intervene sends a strong signal. Trial courts and appellate panels in the Second, Third, Fourth, Fifth, and Sixth Districts are not bound by the holding, but they are permitted to follow it, and many practitioners expect they will. The decision’s detailed analysis of Civil Code Section 1671 provides a roadmap that borrower-side attorneys across the state have already begun citing in litigation and arbitration proceedings.
For practical purposes, Geraci LLP’s lending compliance team advises treating Honchariw as the governing standard statewide. Lenders who continue to assess default interest on the full principal balance following a payment-only default do so at their own risk, regardless of which county or appellate district they operate in.
How the Industry Has Adapted Since 2022
The private lending community has undergone meaningful changes in response to the Honchariw ruling. Those changes fall into several categories.
Revised Default Interest Provisions
Most institutional private lenders have updated their promissory notes and loan agreements to distinguish explicitly between payment defaults and maturity defaults. Modern loan documents in California now commonly include language that limits default interest to past-due installment amounts during the loan term, while preserving the right to assess default interest on the full principal balance once the loan reaches maturity or the lender accelerates the obligation following a material breach.
Enhanced Late Fee Structures
Because default interest on pre-maturity payment defaults is now restricted, lenders have turned to late fees as the primary financial deterrent for missed installments. California law permits reasonable late charges, typically structured as a percentage of the overdue payment. Many lenders have revised their late fee provisions to ensure they capture the maximum permissible charge while maintaining defensibility under Section 1671’s reasonableness standard.
A well-drafted late charge provision should reflect an estimate of the actual costs the lender incurs when a payment is missed: administrative follow-up, investor reporting disruptions, increased monitoring costs, and similar operational impacts. Documentation of these anticipated costs at the time of loan origination strengthens enforceability.
Acceleration Clauses as a Strategic Tool
One area that Honchariw did not directly address is the interplay between payment defaults, acceleration, and maturity. If a borrower defaults on a monthly payment and the lender exercises a contractual right to accelerate the entire loan balance, that acceleration arguably converts the default into a maturity event, because the full principal becomes immediately due and payable.
This interpretation has not been tested in a published California appellate opinion, and lenders should not rely on it without understanding the litigation risk. However, acceleration clauses drafted with precision — and exercised consistently — may provide a pathway to default interest on the full balance even in the context of a payment default. Geraci LLP’s lending compliance team recommends that lenders work with experienced counsel to structure acceleration provisions that align with current case law while preserving maximum flexibility.
Supplemental Fee Provisions
Some lenders have introduced additional fee structures that fall outside the scope of the Honchariw analysis. These may include inspection fees triggered by default, property preservation charges, enhanced reporting fees, or other costs that the lender can demonstrate are tied to actual expenses incurred as a result of borrower non-performance. Each of these must be drafted carefully to satisfy the reasonableness requirements of Section 1671.
Drafting Default Provisions for 2025 and Beyond
Given the current state of the law, Geraci LLP recommends that private lenders review and update their loan documentation with the following framework in mind.
Tiered Default Interest Language
Loan documents should contain separate, clearly delineated provisions for:
- Pre-maturity payment defaults: Default interest, if any, calculated only on the specific installment amounts that are past due. The rate and method of calculation should reflect a reasonable estimate of the lender’s anticipated damages from the late payment.
- Maturity defaults: Default interest on the entire outstanding principal balance, effective upon the loan’s maturity date or upon valid acceleration of the obligation. This provision remains enforceable under current law.
- Non-monetary defaults: Defaults arising from covenant violations, insurance lapses, or other non-payment breaches should be addressed separately, with remedies that may include acceleration but should not automatically trigger default interest absent careful drafting.
Late Charge Best Practices
Late charges on missed installments should be:
- Expressed as a fixed percentage of the overdue amount (commonly 5-10% for business-purpose loans)
- Supported by a contemporaneous estimate of actual costs the lender anticipates incurring
- Applied per occurrence rather than compounding
- Clearly distinguished from default interest in the loan documents to avoid conflation
Acceleration Provisions
Acceleration clauses should be drafted to:
- Require written notice to the borrower before acceleration takes effect
- Specify a cure period where appropriate
- State explicitly that upon acceleration, the full unpaid principal becomes immediately due and the loan is treated as having reached maturity for all purposes, including the assessment of default interest
- Comply with applicable notice requirements under California foreclosure law
Representations and Acknowledgments
Consider including borrower acknowledgments that default interest and late fee provisions were negotiated at arm’s length, that the borrower had the opportunity to consult independent counsel, and that the charges reflect the parties’ reasonable estimate of anticipated damages. While these acknowledgments are not dispositive, they support the lender’s position that the provisions satisfy Civil Code Section 1671.
National Implications of the Honchariw Framework
California appellate decisions frequently influence courts in other states, and the Honchariw ruling is no exception. The decision’s analysis of whether default interest constitutes a penalty versus enforceable liquidated damages mirrors frameworks used in New York, Texas, Florida, and other states where private lending activity is concentrated.
Lenders originating loans in multiple jurisdictions should review their default interest provisions on a state-by-state basis. Even in states where California precedent has no binding authority, the analytical framework from Honchariw — particularly its emphasis on proportionality between the default interest charge and the actual damages anticipated from the breach — provides ammunition for borrowers challenging default interest in any jurisdiction.
Multi-state lenders should also be aware that some states impose additional statutory restrictions on default interest rates and late charges. A provision that is enforceable in one state may violate usury or penalty statutes in another. Comprehensive legal review of loan documents for each state of origination is essential.
What Has Not Changed
It is important to recognize what Honchariw did not alter:
- Maturity default interest remains enforceable. Lenders may still charge default interest on the full outstanding balance when the borrower fails to repay the loan at maturity.
- Reasonable late charges are permissible. Properly structured late fees on missed installments remain valid.
- Foreclosure rights are unaffected. A borrower’s failure to make payments still constitutes a default that permits the lender to pursue foreclosure remedies.
- The note rate itself is not impacted. The regular interest rate on the loan is not subject to the Honchariw analysis. Only the additional default interest charge is at issue.
Looking Ahead: Legislative and Judicial Developments
As of early 2025, no California legislation has been enacted to overturn or modify the Honchariw holding. Industry groups, including the California Mortgage Association and the American Association of Private Lenders, have engaged in advocacy efforts, but a legislative solution has not materialized. Lenders should not plan their compliance strategies around the expectation of a legislative reversal.
On the judicial side, no subsequent published California appellate decision has directly addressed whether acceleration of a loan following a payment default converts the situation into a maturity default for purposes of assessing default interest on the full principal. This remains an open question, and lenders should expect that it will eventually be litigated and decided. Until then, the conservative approach is to avoid relying on acceleration as a workaround without understanding the attendant risk.
Geraci LLP’s Guidance for Private Lenders
The firm’s lending compliance team works with private lenders across California and nationally to structure loan documents, servicing protocols, and enforcement strategies that account for the post-Honchariw legal environment. Whether you are originating new loans, managing a portfolio of existing obligations, or facing a dispute involving default interest, Geraci LLP has the depth of experience in private lending law to protect your position.
To discuss your loan documentation, default interest provisions, or compliance strategy, contact Geraci LLP at (949) 403-3488 or visit us at 90 Discovery, Irvine, CA 92618.
