An Overview of California’s Complex Usury Laws
The term usury refers to the act of charging interest at a rate over the statutorily mandated maximum. California law states that “interest” includes anything of value received by a lending entity from the borrower, notwithstanding the specific type of consideration. It means that payments submitted via fees, bonuses, commissions, and similar charges could all be considered interest.
California’s usury statute restricts the amount of interest that can be levied on any loan of forbearance. According to California law, non-exempt lenders can place a maximum of ten percent annual interest for money, goods, or things utilized mainly for personal, family, or household purposes.
For other types of loans, including but not limited to home improvement, home buying, and business expenses, non-exempt lenders can charge the greater of ten percent annual interest, or five percent plus the Federal Reserve Bank of San Francisco’s discount rate on the 25th day of the month preceding the earlier of the loan’s date of execution.
Identifying exactly when a California-based loan is usurious can be tricky, given the myriad of legal exemptions scattered throughout multiple federal and state code sections. A loan is considered usurious when the interest rate is higher than the maximum amount set forth by statute. The lender’s knowledge is immaterial, meaning that the plaintiff does not have to prove intent, and ignorance of the law is not a viable offense for defendants.
Several California usury laws apply based generally on who is making or arranging the loan. Most banks and similar institutions are exempt from the law. Also, loans arranged by real estate brokers that are secured by real property are exempt from the law. If an exemption applies, there is no limit under California law.
The lender on a usurious loan is subject to two civil penalties. They include forfeiture to the borrower of all interest on the loan and payment to the borrower of triple the amount of interest collected in the year before the borrower brings suit.
Additionally, a lender who willfully receives an interest in violation of the usury laws is guilty of loan sharking, a felony punishable by imprisonment for up to five years.