Does anyone know the penalty of usury?

Question

Hi folks, I lend money to a friend last year in April for her flip in Mountain Baldy, San Bernardino CA. She couldn't get the property sold because of the lease land and some title issues. I signed a promissory note with her. She was supposed to pay me interest every month but she only paid me two months interest till now. I was ok with her last year but it has been 15 months and I don't think she can get the property sold so I want to put NOD on her property. I'm the 2nd TD. 1st TD is my friend as well he is ok for me to start foreclosure process.

I was in contact with a foreclosure trustee. I sent them my promissory note last week. Because I was charging 15% interest on my note she said it is usury and there is a penalty for that. She doesn't know how much the penalty is. I asked my husband(he is a real estate attorney). He said never heard of the penalty. 15% is usury but it causes problem only when borrower comes back suing me then if I go to court judge will ask me to lower it down to 10%. A person can only charge max 10% interest rate. The lady at trustee is not comfortable of working for me unless I lower my interest to 10% and deduct the interest I received from my principle. She heard that from a client's attorney. She doesn't know any code No. of penalty.

Does anyone know the penalty of usury. I'm also looking for other foreclosure trustee. Can anyone give me a referral. Thank you.

Kyle J. · Answer

It sounds like you didn’t fully read what it said and may have missed a key part. It doesn’t say any loan secured by real estate is exempt from CA usury law because that wouldn’t be true. Here’s what it says:

“Loans Secured by Real Property or Used to Purchase, Build, or Improve Real Property: If properly originated and negotiated, such loans are typically exempt when made or arranged by a licensed real estate broker.”

Was your loan to your friend properly originated and negotiated by a licensed real estate broker?

And no offense, but you keep mentioning your attorney husband has never heard of a penalty for usury. I’m not sure of the relevance because I assure you there is one.

You need an attorney who understands this type of law.

Kyle J. · Answer

Hi @Renee Ren.  What you're essentially asking for is legal advice, and for that you should seek out an attorney knowledgeable in this type of law.  In the meantime, here's an article from a law firm (with an office actually in your area) that talks about the possible penalties for loans at a usurious interest rate: CALIFORNIA USURY LAWS: What you should know before lending or borrowing money.

When a loan violates the usury law, it's not a problem until it's a problem (as you're now finding out).  But when it does become a problem, the bulk of the risk is really on the lender, not the borrower.

So it's probably time to use some of that money you made and pay for a consult with an attorney.  And bring your original loan docs/promissory note with you so they can review them.  If you had them drafted by an attorney (probably not since it's at usurious interest rates but you never know), there could be a provision in there for what happens if the loan is deemed to be usurious (i.e. interest rate gets automatically reduced to lawful rate and excessive interest collected gets applied towards unpaid balance of principal).

Good luck and hope it works out for you.

Jeff S. · Answer

Real property is not exempted by CA usury law.

With little exception, if your loan is in excess of 10% APR in CA it's usurious and subject to penalties unless you have an exemption. Whether the lender or borrower, entities do not get an exemption. (Your loan was for a flip, and presumably for a business purpose, which means the San Francisco Federal Reserve bank rate also plays into this. It's been so low for so long that you can effectively ignore it for now and just use the 10% minimum, as defined in the CA constitution.)

You didn't mention whether you secured your loan by recording a deed-of-trust. If you did not, you have nothing more than a personal loan to whomever or whatever you loaned the money to and no direct recourse to the property.

If you did record a deed-of-trust, then your loan is secured by the property. Loans secured by real estate are exempt from usury in CA if a licensed CA real estate broker originated the loan. (Note that in CA, the terms Real Estate Broker and Mortgage Broker are synonymous since they require the same license).

Brokers are effectively exempt from usury. That is, there is no limit to the amount of interest a CA real estate broker can charge for a real estate loan they originate. It appears this was a do-it-yourself loan and that you did not use a broker. If so, at 15% APR, your loan is usurious.

The penalties for making a usurious loan can range from jail time for loan sharking (extremely unlikely, unless you're involved in organized crime), to forfeiture to the borrower of all interest owed, to payment to the borrower of triple the amount of interest collected the year before the borrowed brings suit. In spite of what some think, you don't lose your principal due to usury, though you can easily lose everything from foreclosure.

You are not in a position to be greedy, Renee, and it's probably too late to modify your note.  If I were you I'd simply rewrite any demand letter you wrote to the trustee and reduce the interest down to 10%. That will allow you to proceed with the foreclosure. Depending upon the amount of equity in the property, you could end up getting paid back, to having to pay off the first if you want the property, to losing everything.

One important lesson here, of many, is that you really need a lending attorney to educate you before you do a loan like this. Lending attorneys are not real estate attorneys. Don't feel bad. We learned this lesson early on and ended up modifying a handful of our first loans after foolishly accepting advice from a real estate attorney who did not know his butt from a hole in the ground regarding lending. If you PM me, I'd be happy to give you the name of a few local lending attorneys that could give you advice better than anything you'll receive here, including from me. I mean, especially from me.

You also need a real estate broker with experience originating private loans. Most experienced hard money lenders are either licensed brokers or have one on staff. Some might be willing to help, for a fee. (Not a solicitation. We don't do this.)

Hope this helps, Renee. Good luck.

Jeff S. -- Private Lender from Los Angeles

Michaela G. · Answer

I know nothing about usury laws in California, so, take it for what it's worth.

In Georgia it makes a difference, whether it's a personal residence or if it's an investment property. Since it was lent to an llc, that makes me think that it was an investment property and thus may not fall under usury laws. Someone will know more.

But let us know whether this person lived in the house or if it was an investment

Jay Hinrichs · Answer

has to be done by a broker or at least signed off by your broker.. there are mandatory disclosure docs right on the DRE website you can pull off and read.. pretty basic stuff..

Renee Ren · Answer

Thank you for all the reply. @Jeff S.  My loan is recorded as a 2nd TD. My husband(he is a real estate attorney) said I can still foreclose on her property. I didn't check with him before I lend the money. That was my mistake. "Loans secured by real estate are exempt from usury in CA if a licensed CA real estate broker originated the loan". I'm a licensed real estate agent not a broker. I originated the loan myself. Just used a sample version of promissory note from internet(big mistake). Can I say the loan is originated by a broker?

I'm still in contact with trustee regarding this issue. I'm planning to ask them file NOD on Aug 5. I'll talk to my trustee to reduce the rate to 10% and deduct 2 months interest from my principle. If the penalty is 3 times the interest I collected I can deduct from my principle as well. Thank you again for your advise.

@Michaela G. The property is vacant. This is a flip.

@Jay Hinrichs Yes she can but I don't think she knows and she will do it at this point. I'll talk to my trustee and lower my interest to 10%. Thank you.

@Diana Smith Thank you Diana. My husband is a real estate attorney. I'll check with him.

Jay Hinrichs · Answer

Michaela  ,, just fyi  CA  NV OR make no distinction on a loan on a 1 to 4 unit  if its for investment purposes to a corp or individual etc. in those states any loan made on that asset class requires a license..  there are carve outs for those that are not lenders but you still have to have in some of these like CA a broker handle the paper work and do the disclosures.

Jay Hinrichs · Answer

the lady you lend to can sue your for treble damages and not pay any interest if she lawyers up..

Jay Hinrichs · Answer

I learned about usury way back when... lender kind of schooled me when I was about 25.. and so I took my note to  that big law firm of Jacoby and Meyers..  yup note was flawed it was usurious .. demand letter went out.

100% of my payments went to principal so in the end I got an interest free loan.  my  J and M lawyer said I could have sued for treble damages..

Also I have seen here in Oregon when out of state lenders come in with no license they end up making interest free loans as well if the borrower catch's on that they are not state licensed.. does not matter on a 1 to 4.. any loan in this state needs a license if you hold yourself out as a lender.. there is the 3 a year rule for local citizens in their IRAs that do not hold themselves out as lenders.

And also not quite the same but on the same line as Treble damages.. if you cut timber off of your neighbors property in Oregon by accident yo can be sued for Triple stumpage.. And if you cut state or federal timber you go to Jail..

Does anyone know the penalty of usury?

Most Popular Reply