California Law on Loans, Notes, Interest and Usury

Are You Charging an Illegal Interest Rate on a Loan or Promissory Note?

Many people wrongfully believe they can charge whatever amount of interest the market with bear. Unfortunately, that is not generally the case. In most circumstances, a non-exempt lender is restricted to collecting ten percent (10%) per year on a loan, even if the borrower begs and pleads to pay a higher rate of interest. My office routinely deals with victims of usurious loans, both borrowers and lenders…. yes, even lenders can be victims when they unknowingly loan money at a usurious rate because the penalties for usury can be significant. As we have seen a huge increase in these types of cases, here is an overview of California’s law on interest rates, loans, promissory notes, and usury. In short, however, non-licensed lenders at this time can only charge ten percent (10%) interest a year on a Loan, and if the interest rate is higher than it probably is usurious.

What is Usury and What Makes a Loan Usurious?
Usury is the charging of interest in excess of that allowed by law. California courts have held that “interest” includes anything of value that is received directly or indirectly by the lender from the borrower regardless of the nature or form of the consideration (e.g., fees, bonuses, commissions, and other miscellaneous charges).

California’s usury law, set forth in Article XV Section 1 of the California Constitution and codified in 10 different code sections, limits the amount of interest which can be charged on any loan, or forbearance, of money. A “forbearance” is the refraining from taking legal action to enforce a debt, right, or obligation. Oftentimes, a forbearance would describe the lender’s agreement to extend the due date on an existing loan in return for an increased interest rate.
Pursuant to California law, non-exempt lenders (the average individual) can charge a maximum of: (i) 10% interest per year (.8333% per month) for money, goods or things used primarily for personal, family or household purposes and (ii) for other types of loans (home improvement, home purchase, business purposes, etc.), the greater of 10% interest per year, or 5% plus the Federal Reserve Bank of San Francisco’s discount rate on the 25th day of the month preceding the earlier of the date the loan is contracted for, or executed. In other words, the general rule is that a non-exempt lender cannot charge more than 10% per year (.8333% per month), unless there is an applicable exemption.

It is the multitude of exemptions to California’s usury law that are strewn throughout various code sections (including the Civil Code, the Financial Code, the Insurance Code, etc..) that make California’s usury laws very complicated and difficult to understand. To complicate matters even more, Federal laws and regulations may also be applicable.

Multiple California code sections govern the legal rate of interest that may be agreed upon including:

  1. CALIFORNIA CIVIL CODE SECTION 1917-1917.006
  2. CALIFORNIA CIVIL CODE SECTION 1917.060-1917.069
  3. CALIFORNIA CIVIL CODE SECTION 1917.160-1917.168
  4. CALIFORNIA CIVIL CODE SECTION 1917.610-1917.619
  5. CALIFORNIA COMMERCIAL CODE SECTION 9201-9208
  6. CALIFORNIA CORPORATIONS CODE SECTION 25116 – 25118
  7. CALIFORNIA FINANCIAL CODE SECTION 22000-22064
  8. CALIFORNIA GOVERNMENT CODE SECTION 5900-5909

So, When is a Loan Usurious?
A loan will be deemed to be usurious when the interest charged exceeds the maximum amount prescribed by law. The lender’s knowledge is immaterial. The plaintiff need not prove intent, and failure to know the law is no defense. In fact, even if the borrower proposes a high interest rate and drafts the note, a non-exempt lender will still be held liable for collecting on a usurious loan if the annual interest rate exceeds 10%.

Are There Any Defenses to a Usury Claim?
Absent an exception to the usury law (discussed below), there really are no defenses to a usury claim. Usury is usury