Loans With High Rates of Interest – Be Careful About Usury

By: Serge Filatov

As a corporate attorney here in Silicon Vall

ey and San Jose, I have numerous clients who need help documenting loan transactions and promissory notes . These clients may be taking on debt or providing a loan to a third party. One area of law that clients are not always familiar with is usury law. The California constitution protects individual borrowers from usury, which in simple terms is the lending of money at very high rates of interest. With some notable exceptions, the general rule is that loans cannot have an interest rate that exceeds 10% per year.

How is it then that your credit card company can charge over 10% interest on your

personal card? The answer to that is that there are numerous exceptions

to the general usury rule. In fact, the general rule is riddled with exceptions that are spread out between sections of the California civil, commercial, corporate, and financial code. Often, an exception concerns a specific item that the legislature was concerned with at the time so the exceptions pop up in random places of the California code.

Examples of common exceptions to the rule include California Civil Code Section 1916.1 which states that usury does not apply to loans made or arranged by a licensed California real estate broker, which are secured by liens on real property. Licensed lending institutions such as banks and credit unions are also exempt from usury laws.

Additional common exceptions, at least for the clients that I work with, are (i) loans made to a business that has $2,000,000 or more in assets at the time of the loan or (ii) loans that are for $300,000 or more. In order to qualify for these exceptions, the borrower must meet the following criteria:

  • The borrower cannot be an individual.
  • The lender must have a pre-existing relationship with the borrower.
  • The borrower must reasonably appear to be able to protect its own interests.
  • The loan must not be primarily for personal, family, or household purposes.

What is the big deal about a usurious loan? The lender could forfeit all interest on the entire loan and may have to pay the borrower 3 times the interest paid during the 12 months prior to the filing of a lawsuit. Also, a lender who willfully and maliciously receives interest in violation of usury law can be found guilty of being a loan shark which is a felony punishable by up to 5 years of jail.

Be careful if you are making a loan with a high rate of interest. If you are considering making such a loan, you should consultant with an attorney to confirm that the loan is not usurious.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.