![]() ![]() The impact of this statutory framework is that a usurious loan can potentially transition into an interest-free loan with the added threat of expensive damages and criminal charges. The borrower has several potential cumulative remedies, including: bringing an action for monetary damages for all funds paid over the two-year period preceding the suit seeking damages equivalent to three times the interest paid over the course of the twelve months preceding the filing of a claim seeking a judgment to eliminate all future interest that will come due for the remainder of the loan and recovering punitive damages if the lender’s behavior is deemed oppressive, fraudulent or malicious. If a loan is ruled usurious, the originator may face stiff civil penalties. The California appellate court has ruled that a usurious note can be purged of it usurious terms if both parties to the agreement voluntarily and with full knowledge of the noncompliant format of the original note form a new agreement and the lender credits the borrower with the amount of excess interest paid in the preexisting exchange. However, there is the possibility that the lender and borrower mutually agree to adjust a usurious loan or forbearance agreement in order to make it legally compliant. ![]() Usury claims are clear-cut and thus extremely challenging to mount a defense against-unless, of course, there is an applicable exemption. For example, a borrower could propose and draft a note with a usurious interest rate, and the associated non-exempt lender would still be found liable for collecting on the loan. 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. A loan will generally be considered usurious when the interest rate is higher than the max amount set forth by statute. 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. In simpler terms, the rule-of-thumb is that a non-exempt lender is prohibited from charging more than ten percent annually barring a pertinent exemption. ![]() 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. 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. California judicial precedent has defined “interest” to include anything of value received by a lending entity from the borrower notwithstanding the specific type of consideration-meaning payments submitted via fees, bonuses, commissions and similar charges could all be considered interest.Ĭalifornia’s usury statute restricts the amount of interest that can be levied on any loan or forbearance. The term usury refers to the act of charging interest at a rate over the statutorily mandated maximum. Borrowers and lenders alike need to be cognizant of the potential for usurious loans, as the associated penalties can be severe. The truth is that in the majority of scenarios, a non-exempt lending entity is capped at collecting ten percent annually on a loan, regardless of the borrower’s wishes to pay an elevated interest. It’s a common misconception that you can charge any interest amount as dictated by the market. ![]()
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