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USURY LAW IN CALIFORNIA
Introduction:
Usury is the
charging of excessive interest for a loan and, depending on the
jurisdictions, such actions may lead from penalties in a contract to
even criminal charges being brought. What is “too much interest” has
been a matter long argued about and litigated and now is reduced to
statute in the state of California.
Even in the
Bible one finds proscription of charging “too much” for loans and while
such restrictions are not part of the Ten Commandments, it is perhaps
noteworthy that it was money lenders that Jesus is said to have chased
from the Temple.
As a practical
matter, it may be wondered why there are such restrictions. One can sell
one’s home for whatever price the market will allow and the free market
is the rule rather than the exception for almost all economic
transactions in the United States. Why can one not charge whatever the
market will bear for access to one’s money by way of a loan? Somehow,
that particular transaction involving the loaning of money has resulted
in restrictions being imposed that are unique in the world of commerce.
Perhaps the
answer is found in the fact that most people are borrowers rather than
lenders and the enslavement of debtors or incarceration of debtors was a
common practice from the time of the ancient Greeks up to the founding
of the United States. Indeed, one should note that debtor’s prison was a
typical English tradition which was prohibited in the
United States Constitution and one of the reasons why
bankruptcy
was specifically allowed in the United States Constitution.
Be that as it
may, usury laws are common throughout the United States but in many
cases have been evaded and overcome by various powerful interests who
wish not to be restricted in the amount of interest that can be charged.
In California we have the odd situation that professional lenders such
as banks are not prohibited from charging high interest but individuals
who may be loaning money to a family member are!
This article
shall outline the basics of the California Usury laws and the exceptions
to it often encountered by the business person and consumer in
California.
The Basic Law:
In California,
usury is the charging of interest in excess of that allowed by law. As
stated above, due to the machinations of various entities seeking to
protect their interests, the usury laws are complicated and there are
many exceptions to the general rules. Listed below are some of those
general rules. Since there are exceptions, and the penalties for
violating usury laws are severe, individuals making loans for which
there are interest charges should contact an attorney for further
guidance.
a. The Basic Rate:
The California Constitution allows
parties to contract for interest on a loan primarily for personal,
family or household purposes at a rate not exceeding 10% per
year. Note that as with all other percentages we are listing, this
percentage is based on the unpaid balance. For example, if a loan of
$1,000 is to be paid at the end of one year and there are no payments
during the year, the lender could charge $100 (10%) as interest.
However, if payments are to be made during the year, the maximum charge
allowed could be much less since the outstanding balance would have been
reduced. For example, if half was paid, then the ten percent due on the
remaining half would have to be reduced to ten percent of five hundred
dollars or fifty dollars on that amount.
b. The Exceptions:
In regard to usury, a loan to
be used primarily for home improvement or home purchase is not
regarded as a loan for personal, family or household purposes. With
these loans and for any other loans which are not for personal,
family or household purposes, the allowable rate is the higher of
10% or 5% over the amount charged by the Federal Reserve Bank of San
Francisco on advances to member banks on the 25th day of the month
before the loan (if the agreement to loan and the actual lending of
the money are in different months, the 25th day of the month before the
earlier event is used).
The
usury laws do not apply to any real estate broker if the
loan is secured by real estate.
This applies whether or not he or she is acting as a real estate broker.
The limitations also do not
apply to most lending institutions such as banks, credit unions,
finance companies, pawn brokers, etc. State laws place limitations
on some of these loans, but at a higher percentage rate than the usury
laws listed above.
Time payment contracts (for
example: retail installment contracts and revolving accounts) are not
generally regarded as loans. The usury laws normally do not apply to
them. There are no limits on finance charges for the purchase of
personal, family and household goods or services at this time.
Banks take the position that the charges
for third party credit cards (Visa, MasterCard, American Express,
etc.) are not subject to these limitations and charge interest
far, far in excess of the usury limits, compounded daily. (Many credit
cards offer low introductory rates but if you miss even a single payment
by a single day, impose their “usual” rates which can be above eighteen
percent compounded daily thus in excess of 22% annually…all perfectly
legal.)
In
transactions for the purchase of goods or services which are not
for personal, family
or household purposes, there
are normally no limits
to finance charges except
those set
by the parties.
In the absence of an agreement between
the parties as to what is the rate of interest, the law imposes a rate
of seven percent.
CONCLUSION:
Penalties
placed upon the violator of the usury laws range from criminal
prosecution in extreme cases involving organized crime to forfeiture of
all interest (not just the usurious part) of the Note.
Before making
any loan, the reader will be well advised to read our article on
Promissory Notes:
The Basics as well as
Binding Contracts and should
further get legal advice as to the appropriate rate of interest that the
law would allow.
But note that
the truly large lenders are exempt from the usury laws. As one client
put it, “They restrict us little guys and let the ones who truly need
limits put on them charge whatever they want. That’s crazy.”
Perhaps…but it is also
the law. Learn it.
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