The California Constitution protects citizens within the state from usury, which is the lending of money at excessively high rates. While lenders are generally permitted to contract with borrowers for loans used primarily for personal, family, and household purposes, the interest rate must not exceed 10% per year. However, it is important to understand that this rule allows for certain exemptions — one such exemption often arises in real estate litigation matters when licensed real estate brokers arrange for loans secured by real property.
Pursuant to California law, the amount of interest levied on any loan or forbearance is restricted to a maximum of 10% annually. In other words, non-exempt lenders can impose no more than that rate upon a loan each year. However, the state’s usury laws are extremely complex; state statutes address several exemptions that permit a greater amount of interest to be charged. These California usury law exemptions specifically cover loans involving home improvement, home buying, and business expenses.
California Civil Code Section 1916.1 sets forth the criteria to determine whether a loan has been arranged by a licensed real estate broker to qualify for one of the California usury law exemptions. Under the statute, a loan or forbearance is arranged by an individual who is a licensed real estate broker when the following elements are met:
In addition, the law specifies that the term “made or arranged” includes all loans made by licensed real estate brokers acting as principals or agents for others when they are acting within the course and scope of their licenses.
The 2013 landmark case, Bock v. California Capital Loans, Inc. (California Court of Appeal, Third District, Case No. C069863, May 14, 2013) clarifies the California usury law exemptions as they apply to local real estate brokers. In this matter, the plaintiff sought a loan and was introduced to a real estate broker who served as the sole shareholder of the defendant, California Capital Loans, Inc. (“CCL”).
The broker, without collecting a commission, arranged for the plaintiff to borrow the amount of $1.2 million from CCL, with an interest rate of 15%. The loan was secured with real property. When the plaintiff subsequently defaulted on the loan, CCL foreclosed upon the property and purchased it in a trustee sale. The plaintiff then sued CCL, claiming that the interest rate exceeded the limit imposed by the California Constitution and, thus, the trustee sale should be rendered void.
The lower court entered a judgment in favor of the defendant, holding that the real estate broker and CCL both fall under the exemption that allows for loan interest rates to exceed the 10% cap. The court applied California Civil Code Section 1916.1. which specifies that usury laws do not apply to loans secured by real property “arranged for another” by a licensed real estate broker who is “working for or in expectation of compensation.”
The plaintiff appealed the trial court’s decision, arguing 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.” However, even though the broker was the sole shareholder of CCL, the company was a separate entity — a California corporation. Accordingly, the court held that the broker was acting as a real estate broker working “for another.” Additionally, the court reasoned that a real estate broker arranging a loan can perform services on behalf of 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 qualifies as “another.”
The plaintiff further contended on appeal that since the broker did not collect commission, he failed to meet the exemption which permits a broker to arrange a loan for another if he works “for or in expectation of compensation.” Nevertheless, the court found that while the broker did not collect any commission for the loan because he was the sole shareholder of CCL, he was working “in expectation of compensation” due to the interest the plaintiff owed on the loan. The court reasoned that nothing in the law suggests a real estate broker must receive the compensation solely in the form of commission in order for the exemption to apply. The requisite compensation can also be received as a shareholder.
At first glance, the court’s holding in this case may seem contradictory to California law. But it is crucial to note that the statute is highly nuanced. Since the broker and CCL are distinct and separate legal entities, the broker can satisfy the required element of having arranged a loan “for another.” In addition, 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.” Effectively, this case expands the California usury law exemptions for real estate brokers when arranging a loan for real property.
Real estate transactions can be complex. Our skilled and qualified real estate attorneys will ensure that your interest are protected. We provide high-quality legal services for a broad range of real estate matters in California, including those involving real estate broker disputes. We welcome you to call us to schedule a consultation.