Short answer is probably yes. As a general rule, for written contracts, the maximum annual interest rate is 10% if the loan is for use primarily for personal, family, or household purposes (i.e., a consumer loan). Note that real estate loans acquired to purchase real estate, construct a home or building, or to make improvements are not considered consumer loans. For nonconsumer loans in writing, the maximum interest rate is the higher of (a) 10% per annum or (b) 5% plus the discount rate charged by the Federal Reserve Bank of San Francisco. That means that for the better part of the last decade, the maximum interest rate was 10%. For contracts not in writing, the maximum interest rate is 7%.
An individual or organization found to have issued a usurious loan in California is subject to penalties including:
- payment to the borrower of triple the amount of interest collected in the year before the borrower brings suit
- forfeiture to the borrower on all interest on the loan, even if the entire loan wasn’t usurious.
An individual who knowingly accepts interest on a usurious loan is guilty of loan sharking. Loan sharking is a felony punishable by imprisonment for up to 5 years. Loan sharking is a rare conviction, but it can happen.
That said, usury law has many exceptions, some of which we have summarized for you.
1. Licensed Lending Institutions Are Generally Exempt From Usury
Most licensed lending institutions engaged in the business of making consumer and/or commercial loans such as banks, savings and loan, credit unions, finance companies, and even pawn brokers are exempt from California’s usury laws.
2. Loans Secured by Real Estate that are “Made or Arranged” by a Licensed Real Estate Broker may also be Exempt From Usury.
Loans that are “made or arranged” by a California-licensed real estate broker and secured in whole, or in part, by a lien on real property may be exempt from California’s usury law if originated and negotiated properly. Typically, to qualify for the broker arranged exemption, the real estate broker must do more than simply perform escrow activities on a loan that has already been negotiated and signed by the lender and borrower.
3. A loan made to a California business (corporation, or limited liability company) that has $2,000,000 or more in assets OR that is for $300,000 or more pay be exempt from California’s usury Law if:
(a) the lender and the borrower (or any of its officers, directors or controlling persons) have a pre-existing personal, or business relationship; or
(b) the lender and the borrower by reason of their own business and financial experience, or that of their professional advisors, could reasonably be assumed to have the capacity to protect their own interests in connection with the transaction; and
(c) the loan is not guaranteed by any individual, a revocable trust, or a partnership that has a general partner; and
(d) the purpose of the loan is primarily for something other than personal, family, or household purposes.
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