The Private Lender’s Ultimate Guide to Usury in California: How to Navigate
Usury is one of those legal landmines that most private lenders don’t think about—until it’s too late. California, like many states, has strict rules around how much interest can be charged on a loan. But here’s the twist: while the law appears rigid on its face, there are so many exceptions and carve-outs that a savvy lender can often steer clear of usury claims entirely—if they know where to look.
In this article, we’ll break down the basics of California’s usury laws, highlight the most important exemptions, and explain why ignorance of these rules can lead to serious financial consequences. If you’re lending in the Golden State, here’s what you need to know.
What Is Usury in California?
At its core, usury refers to charging an interest rate that exceeds the legal maximum allowed under California law. That maximum is generally 10% per year regardless if it is for business or consumer purpose—unless the loan is made by a licensed lender, broker, or financial institution subject to specific exceptions. There are enough exemptions to drive trucks through, if you know where to look and how to use them. Here they are below:
Major Exemptions That Open the Door for Private Lenders
California’s usury statute (California Constitution Article XV, Section 1) includes numerous exemptions. Here are some of the most common (and powerful) ones:
1. Loans Made by Licensed Finance Lenders (CFL License)
If a lender is licensed under the California Financing Law (CFL) (California Business and Professions Code 22000 et seq, then the usury laws don’t apply. This is one of the cleanest ways to sidestep the usury issue altogether. Many private lenders pursue a CFL license for this reason alone. There are no education requirements, just a certain net worth (depending on whether you’re doing consumer or business purpose loans) and good moral character.
2. Loans Made or Arranged by Licensed Real Estate Brokers
If a licensed real estate broker makes or arranges the loan and the broker is actively involved in the transaction, the loan may be exempt—even if the broker isn’t the lender. This applies to loans secured by real estate.
Bonus: SB1146 after In Re Moon allows loans modified or forbeared on that were previously made or arranged by a real estate broker to also be exempt.
Made or Arranged Explained
As noted above, loans made or arranged by a California Department of Real Estate (DRE)-licensed broker, provided the broker is acting for compensation or with the expectation of compensation. This carve-out is rooted in the California Constitution, Article XV, Section 1, and is further codified in Civil Code Section 1916.1. The rationale for this exception is to encourage broader access to commercial financing, while still providing regulatory safeguards due to the oversight imposed on licensed brokers.
To rely on this exemption, two conditions must be met:
- The loan (or a forbearance of a purchase money loan) must be secured by real property; and
- A licensed DRE broker must have been involved in the transaction for compensation or with the expectation of it.
A broker qualifies as acting “for compensation” under this exemption in several ways:
- Direct Compensation: The broker is paid or expects to be paid for arranging, negotiating, or soliciting the loan on behalf of another party;
- Real Estate Transaction Tie-In: The broker is involved in a real estate or business opportunity transaction (e.g., a sale or lease) and arranges the financing (or loan modification/refinance) as part of that deal;
- Follow-Up Involvement: The broker assists with modifying or extending a real estate-secured loan that was originally connected to a compensated deal they facilitated.
The exemption also extends to situations where the broker acts as a lender using their own funds, as long as they are not merely acting as the borrower’s agent—this is often referred to as the “broker-made” exception. See Creative Ventures, LLC v. Jim Ward & Associates, 195 Cal. App. 4th 1430, 1442 (2011).
Courts have clarified what it means to “arrange” a loan. The broker must be actively engaged—simply allowing their license to be used or passively documenting the transaction is insufficient. To meet the legal standard, the broker should participate in negotiating loan terms and reviewing or preparing documents for compensation. See Bock v. California Capital Loans, Inc., 216 Cal. App. 4th 264, 268 (2013); Gibbo v. Berger, 123 Cal. App. 4th 396, 402 (2004).
That said, California appellate courts differ on how much broker involvement is enough. Some decisions set a high bar for participation (Del Mar v. Caspe, 222 Cal. App. 3d 1316, 1327), while others adopt a more lenient view (Jones v. Kallman, 199 Cal. App. 3d 131, 134-135; Park Terrace Ltd. v. Teasdale, 100 Cal. App. 4th 802, 807).
3. Loans to Entities (Not Individuals)
Loans made to corporations, LLCs, partnerships, and other business entities are often exempt. To fall under this exemption, the borrower must have a certain net worth. Courts assume that these borrowers have greater bargaining power and are more sophisticated than individual consumers. Most importantly, an individual cannot guarantee this loan or the exemption falls off.
4. Joint Venture
California courts have held that a joint venture between two parties is exempt from usury. See Junkin III v. Golden West Foreclosure Service Inc., 180 Cal. App. 4th 1150 (1st Dist. 2010). Courts applied a five factor test in determining whether there was a joint venture or a loan: (1) whether there is an absolute obligation of repayment (Junkin was obligated to repay the note in favor of Bennett), (2) whether the investor may suffer a risk of loss (Bennett assumed a risk of the loss of capital), (3) whether the investor has any right to participate in management (even though Bennett did not participate in the management, the court viewed this as his personal choice rather than anyone preventing him from doing so), (4) whether the subject property was purchased from a third party (as in this case), and (5) whether the parties considered themselves to be partners in the transaction (both Junkin and Bennett testified they considered themselves to be partners).
5. Open-Ended Sales or Installment Contracts
When a seller finances the sale of goods, real estate (especially commercial property) or services, the transaction may fall outside of usury rules, as long as it’s structured properly and the lender isn’t simply disguising a loan.
6. Charitable Organizations and Institutional Lenders
Certain nonprofits, pension funds, and banks are exempt from usury under both federal and California law. This includes credit unions, commercial banks, and insurance companies operating under federal or state charters.
Why Usury Violations Matter
Violating California’s usury law isn’t just a slap on the wrist. A usurious loan can be declared void, and the lender could lose both interest and principal. In some cases, courts may even impose penalties or require repayment of funds already collected. This makes it absolutely vital for lenders to either qualify under an exemption or cap their rates accordingly.
And here’s a pro tip: just calling a loan a business-purpose loan isn’t enough. Courts look at the true purpose and substance of the transaction, not just how it’s labeled on paper.
The Bottom Line
Usury in California is complex with numerous exemptions—but a trap for the uneducated.
Private lenders who operate with proper legal counsel, structure their loans intelligently, and understand the vast landscape of exemptions can safely navigate the space. But those who take shortcuts or ignore the rules risk losing everything.
Whether you’re new to private lending or a seasoned pro, it’s worth reviewing your processes, tightening your compliance, and—most importantly—working with experienced legal professionals who live and breathe this area of law. Get in touch with Geraci LLP to help you navigate these murky waters.
About the Author
Named to the 2022-2025 Southern California Super Lawyers® list, a designation given to only 5% of attorneys, Anthony Geraci, Esq. is the CEO and a partner at Geraci LLP, in charge of firm strategy and development of Geraci’s team and culture. He is an avid public speaker and strives to provide peace of mind to his employees as well as to all Geraci clients nationwide.
