California Usury Laws Explained: Essentals and Consequences

What You Need to Know Usury Law in California

Usury laws refer to rules and standards that limit the legal interest rate that can be charged or paid in transactions that involve lending. In most states, usury laws apply to the loan transactions and will consider any charges or fees that give rise to a higher interest rate than that allowed under applicable usury laws. The intent of usury laws is to protect borrowers from unreasonable or exorbitant rates of interest . Loan contracts that violate usury laws are typically held to be void and lenders may not pursue the enforcement of such contracts in court. A lender who violates usury laws will be barred from enforcing any contract that charges excessive interest and, in some cases, the lender may be required to rebate the borrower for excess amounts of interest that have been paid. Enforced usury laws can even subject lenders to fines and criminal liability under certain circumstances.

The California Usury Laws and Regulations Explained

The general usury law in California provides that lenders are permitted to charge 10% interest per year (Civil Code Section 1916-2). The general usury law does not apply to a loan of $2,500 or more made by a person or entity not regularly engaged in the business of lending money, credit, or forbearance (Civil Code Section 1916(2)). In addition, Civil Code Section 1917 provides that if the amount of money loaned was $300 or more, then the lender can charge 10% per year plus 5% on any amount over $1,000. If the principal amount of a loan is $9,999 or less, the lender can charge 15% (Civil Code Section 1917).
General usury laws do not apply to a bank, trust company, savings bank, savings society, building and loan association, credit union or similar lending institution or to a loan of $5,000 or more made by a person or entity who has secured a license from the state to make loans (Civil Code Section 1915).
In all of the exceptions, the lender must be either "regularly" or "ernestly and lawfully" engaged in the business of lending money, credit or forbearance. A lender who makes only an isolated or incidental loan will not be precluded by the usury laws from being able to charge interest in excess of 10%. The proper application of the term "incidental" or "isolated" is uncertain, although one case has suggested that the loan at issue is isolated if the loan "represents less than one percent of his gross income." People v Harlowe v Arboit (1955) 132 Ct.App.2d 564.
Under the above monetary thresholds, the maximum interest rates are 10%, 15% and 20% respectively. If the interest charged by a lender is greater than the maximum interest rate for the amount of money loaned, then the usury statute is violated. If a usury violation occurs, the borrower cannot be required to pay interest but can be forced to pay back the principal loan amount. The borrower may also recover attorneys fees in relation to suing the lender for the violation.

Usury Law Exemptions in California

Exempt from California usury laws are those who lend money to corporations or limited liability companies where the amount of the loan is over $100,000 and is secured by first trust deed real property located in California. The lenders who can qualify as exempt these types of loans include (a) banks, savings and loans, savings associations or credit unions organized under the laws of the State of California, or any other state or the United States, (b) insurance companies, (c) trust companies and (d) a number of other sources.
Additionally exempt from the usury laws of California are those who lend money to natural persons if the principal amount of the loan is not more than 10 percent of the borrower’s net worth and not more than five times the borrower’s average monthly net income for the preceding six months.

Consequences of Breaking Usury Laws in California

The Legal Consequences of a Violation of the Usury Law
The principal penalty under California’s usury statute (Civ.Code, sect. 1916-28) is that any unlawfully collected interest is refundable to the borrower (or other party charged with usury). In recent years, however, courts have been less willing to order forfeiture of the principal sum loaned as a penalty for usury. (See, e.g., City of Santa Monica v. Gary K. Koss Co. (1976, 2nd Dist.) 66 Cal.App.3d 304, 136 Cal.Rptr. 475; Reeder v. Fourth & Watkins, Inc. (1963, 3rd Dist.) 218 Cal.App.2d 106, 32 Cal.Rptr. 743.) And although forfeiture of the principal amount loaned is not uncommon in cases of unlicensed, unregulated moneylending, the courts will order forfeiture of the principal only as a last resort. (E.g., People v. Nevil (2004, 2nd Dist.) 122 Cal.App.4th 876, 18 Cal.Rptr.3d 782.) Still, any contract in which interest was reserved or paid may be voided at the option of the borrower. (Civ.Code, sect. 1916-28, subds.(a) and (b); Morton v. Field (1975, 2nd Dist.) 53 Cal.App.3d 975, 126 Cal.Rptr. 733.) Also, a lender sued for usurious interest may not be heard in defense to a breach of contract action because the contract itself is voidable at the option of the borrower. (Morton v. Field, supra, 53 Cal.App.3d at 979, 126 Cal.Rptr. 733.) Nor may the lender be heard to defend a tort claim for fraud, defamation, or conversion, when arising from the usurious loan. (E.g., Davis v. Merchants’ & Miners’ Transp. Co. (1933, 4th Dist.) 127 Cal.App. 246, 15 P.2d 713; Hutton v. Underwood (1973, 1st Dist.) 34 Cal.App.3d 134, 109 Cal.Rptr. 546.) In contrast, the borrower is entitled to setoff against the usurer’s claim for unpaid amounts on the principal. (Hutton v. Underwood, supra, 34 Cal.App.3d at 137, 109 Cal.Rptr. 546; City of Santa Monica v. Gary K. Koss Co., supra, 66 Cal.App.3d at 312, 136 Cal.Rptr. 475.)

Recent Developments Affecting California Usury Laws

California usury laws have seen several significant changes over the years. The usury rate cap applicable to individuals and general partnerships was increased in a bill signed by California Governor Gavin Newsom in July 2019, and, effective as of January 1, 2020, the rate cap applicable to certain credit transactions with people and general partnerships was increased from 10 percent per year or 3 percent plus the Federal Reserve Bank of San Francisco rate to 12 percent per year or 5 percent plus the Federal Reserve Bank of San Francisco rate, whichever is less.
In 1985, California Civil Code Sections 1834-1834.5 were added to the Civil Code in order to exclude supervised financial organizations from usury law liability. Section 1834 reads in relevant part as follows: Failure to comply with such rules or regulations shall not limit the authority of the commissioner to regulate the interest rate and charges for loans not otherwise excepted from usury law liability."
It should be noted that California Civil Code Section 18035, which was repealed in 1985, authorized the California Department of Business Oversight to adopt, among other things, "maximum loan finance charge" regulations.
In Meyer v. OneWest Bank, FSB (2018) 21 Cal.App.5th 438, 454, the Court of Appeal held that a "person" includes an individual and a sole proprietorship, but not an entity that is not an artificial person.
In Green v. Fundamental Investment, L.P. (2019) 38 Cal.App.5th 802, 807-815, the Court of Appeal reaffirmed the rule that a loan receiver of rents under the Uniform Commercial Code may charge a fee for services. The Court of Appeal also held that, in addition to sales of goods, the UCC also applies to "the rental of goods" from the person to whom they are delivered.
One recently decided California usury law case involved an unusual set of facts. In Unicom Building , Inc. v. Aerial Burbank 1, LLC (2020) 46 Cal.App.5th 374, 377, the Court of Appeal held that a qualified lender who was not a party to a loan agreement could not sue on the loan agreement because it lacked standing, and could not avail itself of a new equitable doctrine that allows third parties to enforce contracts made for the benefit of such third parties. The borrower had purchased a parcel of land encumbered by several delinquent liens, including a note and deed of trust securing a questionable $4 million construction loan. The new borrower made payments on the questionable loan agreement to the lender who collected the payments, and distributed some of the payments to himself for services rendered on the project without remitting payment to the borrower. The parties disputed whether the borrower breached the loan agreement with the lender who claimed that a breach had occurred and, to mitigate its damages, loaned $1 million to the borrower. The borrower contended that it was entitled to offset the $1 million loan repayment against the $4 million loan repayment and the lender contended that it mitigated its damages by, among other things, loaning $1 million to the borrower. The Court of Appeal held that the doctrine of rescuer of the bargain ("ROTB") does not enable an action on a contract that was not made for the benefit of the third party dual agent/rescuer. The primary purpose of the ROTB doctrine is to restore a party to a fair equivalence with the value he would have received if the contract had not been breached. Having found that the lender was not a party to the loan agreement between the borrower and the other lender, the Court of Appeal held that the lender lacked standing to assert a claim for breach of the loan agreement as a third party beneficiary and did not satisfy the requirements for a ROTB recovery.

How Usury Laws Affect Borrowers and Lenders

The impact of usury laws on borrowers and lenders in California encompasses a range of provisions and circumstances. California’s usury laws protect borrowers from paying exorbitant interest rates for consumer, auto, and housing loans.
Yet, well-established exemptions to the Usury Law indicate that a borrower might be out of luck if the loan is business related. In some cases, real estate lenders are protected by the exemption. Nevertheless, when it comes to the "crazy high" interest rates that are prohibited under the Usury Statute, the real estate lender and the commercial loan borrower need not depend on the Usury Law for protection from lender abuse. To illustrate:
If the loan is a real property secured loan both the real estate lender and the commercial loan borrower have a choice: they may either move forward with the loan secured by real property under the older Usury Statute or, they may escape the restrictions of the Usury Statute that applies to loans secured by real property in California. In exchange for the 24% maximum interest rate set forth in the Usury Statute, the offending lender or seller/lender may accelerate the time for the borrower to repay the borrowed money.
When a real estate broker enters into a loan, that loan may be subject to the Usury Law (Financial Code §§ 22000 et seq.). A loan made for a consumer, auto, or housing loan is covered by the law’s cap on interest rates. The Usury Law penalty is forfeiture of everything the lender or seller/lender is charging pursuant to the note or contract. Yet, when the loan is secured by a deed of trust, the cap on interest rates can be avoided through certain exceptions.
If the real estate loan is a commercial loan or a loan to a corporation and the lender is a real estate broker, the loan must comply with the Usury Law’s provisions. However, the broker is able to avoid the harsh penalties of the Usury Statute by using a promissory note as consideration. The broker is not limited to the 24% Usury Statute maximum, so long as the broker does not rely only upon a note as consideration for the loan.
To qualify as a broker, the lender must possess a California real estate broker’s license and be a party to the Deed of Trust. The note may or may not identify the lender as a broker. The note may or may not specify that the broker made the loan to the borrower. Nonetheless, the lender still qualifies as a broker to maximize the consideration that will be used to protect its lien rights.
Other lenders are treated similarly. A bank charged with the "crazy high rate" of interest on a consumer, auto, or housing loan must forfeit all of the lender’s penalties. Nevertheless, if the bank instead structured the loan as one governed by California Commercial Code § 9-509, then the Usury Law’s penalties can be avoided. As a result, when the borrower defaults, the bank may foreclose and seek a deficiency judgment so long as the loan is governed by Article 9 of the Commercial Code.
Further, private lenders including private money lenders, hard money lenders, and crowdsourced money lenders must likewise abide by the Usury Law if they are not licensed by the Department of Business Oversight or other financial institution regulators. However, private lenders can likewise structure their transactions as not being subject to the Usury Law by utilizing Article 9 of the Commercial Code to avoid Usury Law penalties.
At present, contractual attempts to avoid the Law of Usury or recover penalties the lender might otherwise owe are ineffective. In addition to foreclosure, the lender may not recover penalties nor foreclose upon a note without also seeking to recover all of the principal owed and the interest at the lawful rate. However, the lender need not seek to accelerate the note, gain an award of attorney fees, or recover a deficiency judgment if the lender made a Consumer, Auto, or Housing loan subject to the Usury Statute.
The impact of the Usury Law provisions therefore results in requiring a consumer, auto, or housing loan lender to forfeit all of its legal, contractual rights. The impact on the borrower is usually favorable. Nevertheless, the merchant lender should act to avoid the Usury Law penalties, especially if the lender intends to seek a deficiency in connection with a default by the borrower.

California Usury Laws Compared with Other States

California usury laws have some parallels with such laws in other states, but there are a number of significant differences. California, like most states, prohibits usury only when there has been loan sharking. In HM Mortgage & Realty v. Eckford, the U.S. Court of Appeals for the Ninth Circuit explained the difference between usury and loan sharking as follows: The term "usury" simply means the charging of an illegal rate of interest. The term "loan sharking" refers to the collection of interest that is prohibited under the usury laws, but which is coupled with strong-arm collection techniques whereby the borrower is forced to repay the principal plus a large interest rate.
In some states, like Florida, there can be liability for usury even when there was not loan sharking if a loan is granted at an interest rate greater than the state usury limit and if the loan was given in one of a long list of prohibited ways (e.g., a loan secured by a mortgage). In California, however, even though the California usury laws are not limited to usury that involves loan sharking, there must nevertheless be some form of violation of the California laws against usury and there is no such thing as liability simply for entering into a usurious loan.
Another key distinction between California usury laws and the usury laws of many other states is that California law provides that usury is a complete defense to the enforcement of a loan contract if the principal amount of the loan is within the state usury limit. Some other states, like Wisconsin, penalize usury by making an usurious loan void for any unpaid principal or interest.
Further, usury laws in other states make any transaction that violates their usury laws void, while usury laws in California permit recovery of the lawful percentage of usury, allowing recovery of principal and the lawful interest rate.

Tips for Both Lenders and Borrowers

Lenders should stay abreast of changes in the law, including usury exception laws, and lend within the confines of those exceptions. As always, lenders should draft clear loan documents and define all of the terms therein, including the "annual percentage rate" of interest . Both lenders and borrowers should consult with experienced counsel to discuss their rights, obligations, and potential liabilities under usury laws beyond the simple question of whether the loan’s interest rate is higher than the maximum annual percentage rate.