California Usury Exemption for Real Estate Brokers

The California constitution protects its citizens from usury, which is the lending of money at excessively high interest rates. Although the California Constitution generally allows for a lender to contract with a borrower for a loan primarily for personal, family or household purposes, the interest rate must not exceed 10% per year. However, there are certain exemptions to this rule and one such exemption that arises in real estate litigation is when real estate brokers arrange for loans secured by real property.

In the recent case, Bock v. California Capital Loans, Inc. (California Court of Appeal, Third District, Case No. C069863, May 14, 2013), the plaintiff needed a loan and was introduced to a real estate broker who was the sole shareholder of the defendant, California Capital Loans, Inc. (“CCL”). The broker, without collecting commission, arranged for the plaintiff to borrow $1.2 million, at the interest rate of 15%, from CCL, securing the loan with real property. When the plaintiff defaulted on the loan, CCL foreclosed and purchased the securing property in a trustee sale. The plaintiff then sued CCL, claiming that the interest rate exceeded the Constitutional limit and, thus, the trustee sale was void.

The court reasoned that the broker and CCL fall under an exemption in the California constitution that allows for loan interest rates to exceed 10%. California Civil Code section 1916.1 explains that usury laws do not apply to any loans secured by real property arranged for another by a licensed real estate broker working for or in expectation of compensation.

The plaintiff argued that since the broker was the sole shareholder of CCL, he failed to meet the first prong of the exemption, which requires a broker to arrange a loan for another. Although the broker was sole shareholder of CCL, the company was a separate California corporation and, therefore, a completely separate legal entity. Accordingly, the court held that the broker was acting as a real estate broker working for another. Furthermore, the court held that a real estate broker arranging a loan can perform services for both the lender and the borrower. Thus, by arranging the loan between CCL and the plaintiff, the broker was found to have serviced the plaintiff, who then qualifies as “another.”

As to the second prong, the plaintiff contended that since the broker did not collect commission for the loan, he failed to meet the exemption which permits the real estate broker to arrange a loan for another if he work for or in expectation of compensation. The court held that although the broker did not collect any commission for the loan between the parties, because he was the sole shareholder of CCL, he was working in expectation of compensation through the interest that the plaintiff owed on the loan. The court reasoned that nothing in the law suggests that a real estate broker must receive the compensation solely in the form of commission for the exemption to apply – he can receive compensation as a shareholder.

The court’s reasoning may seem contradictory because the court permitted use of the exemption because the broker and CCL are distinct and separate legal entities (and therefore arranged a loan for another), but at the same time, the court also stated that a shareholder interest in that separate legal entity was sufficient to show the broker was working in expectation of compensation. However, the effect for real estate brokers is an expansion of the usury exemption when arranging a loan on real property.

Fred Pfister is an associate at White and Bright specializing in real estate and business litigation. For questions relating to this article or for assistance with real estate litigation, please contact Mr. Pfister at White and Bright (760-747-3200).

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