California Usury 101: What Interest Rate Can You Charge?

Melissa Martorella:

All right, I'm going to go ahead and get us started. Hopefully if you haven't joined, you'll be jumping in at the beginning here so you don't miss too much. But welcome. Thank you for joining us on today's webinar. Today the topic of choice is California Usury 101. What interest rate can you charge? So we'll go a little bit more in depth about what is usury, what interest rates are permissible, especially in California. Things to look out for, common pitfalls. We'll get right going into it. So first little introduction. Who are we? I've done a few of these webinars, I'm sure you've seen me before, but my name is Melissa Martorella, I'm an attorney on the transactional team. I specialize in preparing loan documents in all 50 states as well as providing compliance advice. In addition, I also manage the team's non-judicial foreclosure practice here in California. So I'm able to help with that and anything that kind of comes out of that, forbearances, modifications, anything like that. And Anthony, if you'd like to introduce yourself?

Anthony Geraci:

Sure. Great to see everybody. My name's Anthony Geraci, as you may know I run the firm overall, but in this capacity, really helping all the teams out. In this case, litigation. Early on in my career, I cut my teeth a lot on usury issues and cleaned up a lot for those who have been here as long as me. If you remember, 2004, 2005, a lot of those issues came up as well, as loans started declined. So funny enough, we see these coming back again, so we thought it was about time to discuss again, usually laws. So looking forward to talking with you guys about it.

Melissa Martorella:

Awesome. So a few housekeeping items before we get fully launched into this thing. First, we get this every time. People are going to ask throughout and ask afterwards. But yes, the slides will be available to you as will be a recording of this webinar, of this presentation. Those will be sent to all of you automatically after the webinar has concluded and we have a chance to upload the recording. In addition, in that email that provides you the slides in that recording, there are going to be some links to some helpful follow up articles on the same topic. So they'll go into a little bit more depth on some of the concepts that we talk to you about here. And as always, we're available. You'll have our contact information from that email as well to be able to reach out to us with any follow up questions.

Second piece of housekeeping, at the bottom of your screen, there are two windows. There's a q and a and a chat. Don't use the chat, don't want to do it. If you have any questions, put 'em in the q and a. Anthony and I at the very end of the webinar, we'll go through your questions to as much as we can. We'll answer as many questions as we can and we'll go through those at the end. So feel free as they pop up throughout the webinar, put them in there and we'll just kind of go through them in order. So that will be coming. So getting us started today, here's our agenda. So a couple different concepts we're going to talk to you about. First is really, it's not up here, but what even is usury? How California views usury and establishes maximum interest rates, exemptions to usury under California law, and some common approaches to determine interest rates and default rates.

So I'll kind of walk you through those three concepts. Then Anthony's going to take over. He's going to walk you through how to fix a usurious loan and also some penalties if you do happen to have a usurious loan on your books. But hopefully we'll be able to walk you through it so those things won't happen and everything will be a okay. And then finally at the end here, we will go through a q and a. Reminder, we are able to specialize and provide advice, especially on usury and other items across the country. So if you have questions about random states, we're happy to help you. However, the focus of this webinar is on California usury specifically. So just want to throw that disclaimer out there. So getting started what is usury? So big picture, usury was really the act of lending money and you're doing so at an interest rate that's either so unreasonably high or it's higher than any rate that's permissible by law.

usury goes back, it's in the Bible, it's in early law, it goes back to, I think it was like king something or other in England, there's a lot. It's all throughout history. Basically people, as soon as people were making money and trading, people were saying, Hey, I'll make you a loan for that and I'm going to charge you interest on it. And so as soon as people started lending usury became an issue because some people were charging really high interest rates, taking advantage of others. And people said, Hey, we want to prevent that. We want to make sure that you can't charge insanely high interest rates, or if you do, there has to be a certain reason why you are permitted to do it. So that's where this concept of usury comes from. So it's really there's a limit to the interest that you can charge and you have exceeded it.

And that's what usury is. So big picture, you really need to figure out when you're making loans, what is that maximum rate of interest that you can charge on a loan that is permissible, so therefore you don't fall under a usury problem. And then what's included in that usury analysis or that interest rate analysis to get to figure out what the interest rate is that you're actually charging, it depends on the type of loan you're making. Some states have different analysis to determine what that actual interest rate is. Sometimes they'll include default rate interest into that. Sometimes they'll include late charges, other fees. California though is pretty helpful really in California, a really basic way to approach it is you're going to take the interest rate on the note plus any points that are going to the lender or broker throughout the transaction that is going to be considered your interest on the loan and therefore we'll go into the analysis to determine whether you fall above or below that maximum rate of interest that you can charge. And thankfully in California default interest is exempt from usury. So we'll talk about the cap in California or the maximum interest rate you can charge in California in the next slide but you can exceed that for your default interest rate even if you don't fall under an exemption. So that's really exciting. And late charges are not considered part of this analysis either. A lot of states do include that but California thankfully does not. So it makes it a little bit easier to calculate here.

So moving on like we said, these usury laws and issues with wanting to protect people from crazy high interest rates, you go back, they they're found in all sorts of places. In California, for example, it's in our actual California state constitution it talks about usury, really interesting. But Article 15 of the California constitution will outline our rules and restrictions relating to usury. But big picture, what you need to know for business purpose loans, that maximum interest or rate of interest that you can charge on any loan is the greater of 5%, or I'm sorry, the greater of 10% per year or 5% per year, plus the prevailing rate of interest established by the Federal Reserve Bank of San Francisco. So big picture that rate that's established by that bank in San Francisco, that's always changing. You're going to always have to be looking at it, figuring out sometimes that's going to be more than 10%.

So sometimes that's less general rule of thumb for you here and that we go by is stick to 10% because it's going to be the greater of the two things. It's very rarely I think going to be above 10% by using the analysis under B. So generally our rule of thumb that we advise our clients on when we're making loans is stick to 10%. That's a safe bet. We know it's always going to be allowed. And if it so happens that you could have charged 10 and a quarter, sorry we'll get there. But at the end of the day, I think the 10% is the safest route. It's consistent you know what it is. We'll kind of go a little bit more in depth on how that's calculated based on your interest rate and points on a few slides. But yeah, so big picture California says 10%, that's what you can charge on a loan and if you exceed 10%, you have a usury problem.

However, California's also really helpful. Amazing. So we have several helpful exemptions in California to get you above that amount. So say you have a really complex loan, it's maybe a really risky loan and you want to be able to charge above 10%. There are ways to do that. So the first two up here, I'm sure most of you are very familiar with, and this is how you're getting around the usury issue in California or this maximum interest rate issue. So first, licensed lending entities. So a California finance lender, they are exempt from usury in California. So that means they could charge more than 10% on their loan. That means that they could charge more points on a loan and exceed that 10% cap. The second one, also super popular here, real estate secured loans when arranged by a licensed broker by the Department of Real Estate.

So again, a lot of you, you might be an unlicensed lender, but you're having brokers come to you arranging those loan transactions, their license, good to go. You can exceed 10% on your interest rate or between the combination of interest rate and points on the transaction. You're fine. You're exempt from that 10% maximum. So good to go. The one qualification that I would say to this is, this broker can't be just on the deal. You know, can't just throw 'em on there to be like, yeah, we got a broker, look, but really you did everything. That broker has to be acting as a broker. They have to be arranging the loan between the parties. They have to be doing more than just saying, yeah, we're good. They actually have to be involved and providing brokerage services for this to qualify. I'm sure most of you are fine, but the whole just slapping a broker on at the very end to get out of this. It's not generally a good idea. <laugh>

Third helpful exemption here are seller finance loans. So you own a part A property, you're going to sell it to somebody and you're going to carry back a loan on that property to help finance it. The reason this is exempt is because really that's, if you think about it, it's a sales price. You could have sold it for more or less and you're just saying, Hey, I'm going to help you finance that purchase. So it's really not even considered a loan. So there you go, exempt from Usri. So if you happen to have any of those that you're doing good to go. Number four is an interesting one. We get this pop up from time to time. It's a little bit difficult to rely on, but it is something that is available. So it's a loan to certain California based corporate entities. So an llc, a corporation, a partnership, but it has to be in California.

It cannot be a Nevada LLC or an Arizona corporation. It must be a California entity. Then there's two points here. First, that California entity must either have more than 2 million in assets, so in very clearly documented or your loan has to be greater than $300,000. So that's usually the easier one to follow. And you either need to have a previous relationship with that borrower or based on their experience, you can determine that both parties, so the transaction have the ability to protect their own interest. The loan is for business purposes and you cannot have a personal guarantee from any individual revocable trust or partnership with a general partner. And that's usually the one that kills this option because you usually in business loans, you want a personal guarantee but if you can otherwise fall under this, you're comfortable with the transaction, you're okay without a guarantee, then you could potentially go this route.

But since there are a lot of steps in here and a lot of analysis, I strongly recommend reaching out before relying on this exemption to make sure that we check all the boxes and it's an appropriate way to rely on exceeding that 10% cap on your loan. And then the last two, not so relevant for what a lot of our clients are doing, but they are exemptions in California. So just to bring them up time payment agreements and credit cards, those are exempt from the usury restrictions in California as our licensed pawn brokers to an extent, I believe it's either 22 or 24% that they can go up to. So a lot of helpful exemptions but like we said, those first two are going to be the ones that we're really focused on, especially with our clients. The loan is made by a licensed California finance lender or it's a loan arranged by a licensed DRE broker. So those are the two big ones. You're good to go

Anthony Geraci:

And something will emphasize most, if you don't mind. Yeah, the licensed broker aspect, and I by broker we mean broker. I could tell you quite a few handful of times I've had this scenario. In fact, it was happening a couple years ago a very prominent realtor and Orange County was doing some carry back loans at a different company. Hey, I'll sell you this and I'll also make the loan for you. The broker listed not only had no idea about what was going on, did not receive any compensation for the deal. And just very clearly the salesperson was acting with their own business and unfortunately that was a pretty clear cut case of that exemption not applying. When they mean broker, they definitely mean the real estate broker also being compensated directly or indirectly.

Melissa Martorella:

Great point. Yeah, we definitely get that issue pop up a lot. People are trying to do creative ways of financing, but it really does mean you have to have a broker on this deal. They have to be performing their brokerage services and they really should be getting that fee through the transaction. They have to receive some benefit for their services. So then moving on here, what rate shouldn't you charge on your loan? So the first question you want to ask is are you exempt? Are you exempt from that 10% cap that California sets out? If you are, then just look at what's reasonable based on your loan type and related risks. So if you're doing a first position position trustee on a really good property, great borrower, et cetera, you're probably looking at a lower rate anyways because that's what the market is saying. Versus if you're doing a third position lean on a property with a borrower that has several defaults in their past and is trying to get out of construction that seems risky you might want to charge a higher interest rate that might be in the teams really looks at what's your loan, what is the scenario, and then go from there.

But if you are not exempt, you don't have one of those way of those ways around the usury issue In California, you're capped at 10% and that includes any origination fees. So I gave you a couple examples here that either means you're charging 8% rate on the loan and you're getting two points at closing to get to you to that 10% or you're charging a 10% rate and no points or any other combination there. But you really can't exceed that 10% between the interest rate and the points. So a little bit of a calculation, but it is something to be aware of if you are not exempt from usury in California.

And then the last little bit that I'll talk about here is what about default interests? So yes, as we said earlier, it is exempt from the usury analysis in California so you don't have to worry about it. You can charge what you want. However disclaimer, it's really not a free for all. It doesn't mean, okay, cool, I'm going to charge 3000% default interest. If you default on my loan. There's this concept in California called unconscionability and it means that the terms of the contract are so unfair that it would be on wrong to uphold them. And this is how we attack default interest in California. When the rates are super high borrowers will say it was a, I don't know, a 50% default rate, that's so crazy, I shouldn't have to pay for that. And sometimes courts will say, okay, yeah, based on the terms of this contract, it's unfair.

It's unreasonable. We're not going to uphold that. However, 50% may make sense in the circumstances. It is super fact specific. I do know that 200% interest has been deemed unconscionable. So probably good to stay away from rates that high on your default interest but really it's a case by case analysis. I get people all the time calling me saying, well what is it? Is it 30%? Is it 25%? And honestly, I don't know, haven't not gotten that granular. Granular in court cases. It's not something that we've seen where there's a hard line at 26% would get you into unconscionability. It is super fact driven on your scenario. So we have a general recommendation. Our general recommendation in California is to put your default rate at either four to 6% above the note rate, couple more percentage points clearly if there's a default that's going to get the borrower wanting to perform quickly and get out of default or 18% is fairly common across board. So either one of those two things, that's probably the route that I would take with regards to what default interest rate you just charge on your loan with that Anthony, take it away.

Anthony Geraci:

You got it. So one thing we discussed, but I can't emphasize this enough because I heard this so many times. Well, but this is a consumer loan, it's a business loan and the usury provisions apply to any loan, literally any loan. Of course there's exemptions that fit into it, but that's a default analysis. If it's above 10%, then you're in the usury territory. We start looking for those exemptions or anything like that. So be very cognizant of this as well as keep in mind, and you'll see it in a couple examples in the next slide of California, usury is tied to the constitution and I think that drives a lot of the policy as well as a lot of the challenges and of course solutions within it. I use the terminology that there are enough exemptions to drive trucks through in California, but if you don't find the exemption usre can be very, very, very penalizing. So most of you don't mind hitting the next slide there. Sorry, I don't have tools there.

Melissa Martorella:

No, of course I can do that. And I guess to just piggyback a little bit off of what you're saying, oftentimes we have lenders that are lending outside of California and coming in and confused on this point. Many states do say if it is a business purpose loan, it is exempt from usury in their state, not the case in California. So it is a definite point of confusion here, especially when you have people moving into California to lend.

Anthony Geraci:

Yeah, absolutely. And as part of that, some of the penalties were users usurious loans. If you come from a state not in California, remembering that it is part constitutional, not just statutory. Imagine having in the constitution of the United States for reference, you cannot lend usurious rates. That's how it is in California. And so some of these things are going to make sense if you keep it in that framework. So sounds like a harsh penalty, but let's just say you are an usurious territory. The loan is void as a matter of law. That means you can't collect on it, you can't foreclose on the loan on the property. If you find it, you really have a void loan, not voidable, it is void, which means it does not exist. The terms of the contract cannot be enforceable and it is unable. And let's talk about this because there was a case in 2018 called Hathaway and which they tried a general release provision on a usury and that was not held to be waived.

So in order to waive usury if it's an issue really has to be specific release, you have to in the release talk about usury as part of it and they were specifically releasing the usury claims in order for that to be enforced in California courts. So that was kind of a surprise a couple years ago. But just a reminder for all of you guys, if you find yourself in serious territory, just a general settlement agreement is not going to clean up, if you will. The usury issues I could tell you about that case also because they had a settlement agreement. The lenders thinking they're done at this point and then of course the case moves forward. Not only that, another $900,000 in interest in fees cost that window a lotted money. So that that's important. Just as important as well that is troubled damages. So three times the amount if you are found to be intentionally violating the usury laws, most of the time that does not come up there is, it's very unclear in California law as far as what intention means.

Some judges have thought intention means, oh well you did it. And I don't think that's true because they would not have trouble damages. You have to somehow prove that you knew about the usury laws and said, you know what, forget it. I'm still charging you this interest. And so I've not seen too much of that, although they do have a penalty for that. So that's the question. It really requires an actual constructive knowledge and really an intent to charge these usury seriously rates. So there's some savings and we'll talk about that in the next slide as well about what can you do Melissa, if you have anything to add to that?

Melissa Martorella:

Not at all.

Anthony Geraci:

So there's some concepts in the loan documents for gosh, give me a second for usury savings clauses. And those are definitely something you should have in your agreements. What that means is if a court finds that this is above maximum, well then we should actually have a rewriting the contract to stay under usey laws. If you don't have that, of course there are other things you can do. Again, I'm putting the context again, I'm going to remind you what I just said is that your loan is now void as of law. So there are other things you can do. Let's talk about statute of limitations defense in most states, California being no exception, there is a statute of limitations. And what that means is if you sit on your rights for a period of time, you cannot bring that back up. The whole theory being, well, you didn't know about it and it'd be unfair 20 years later to hold it against me if you will.

So the statute of limitations for usury is two years from the last payment. And so what I tell people is if you're getting close to that two year time, be very watchful for someone trying to send you a payment that you did not expect. For whatever reason they may become aware of their rights and are now trying to restart that statute of limitations defense. So that that's one thing. The other one is unjust enrichment. So okay, it's avoided loan, you've, you've got issues with it, you can't enforce it. Well you sent still let money either finance something, you gave them something as a result and they have been unjustly enriched as a result that is still recoverable and likely will have to be recovered either through settlement or through a lawsuit. So that would be dependent on what your situation is. And then again, modifier for bear. The loan I, I'm sure Melissa can talk to you guys a lot more on this one. But if you are going to, and of course we recommend here to do so, please include specific language about usury if you feel it's a concern in your loan. If you're above most of the time, if you're above that 10% and you don't have an exemption, then let's no issue to say, Hey, you have a usre waive it. Generally at the time they're willing to modify for bear, they don't want to sign almost anything.

Melissa Martorella:

Exactly. And we've definitely done that in forbearance agreements or modifications. We've amended that interest rate to bring it back into compliance and then included a strong release of claims with regards to user. So that's something we can definitely do if you're in that situation and you're a little bit nervous because Barr is defaulting, they're not repaying the loan, they're not paying you off and you want to make sure that there's no additional pending lawsuit down the line, that forbearance or modification could really help you in that case.

Anthony Geraci:

Absolutely.

Melissa Martorella:

It was a quick webinar. If you have follow up questions that we don't get to right now feel free, our contact information is here below. Feel free to reach out to us. We would be happy to discuss with you. Let me see if I can find wherever the oh my God, <laugh>, wherever the q and A are perhaps Danny, if you could help me that would be lovely. I have a task bar stuck.

Anthony Geraci:

Oh no, that's right at the bottom. Do you want me to read them Melissa? I can, yeah,

Melissa Martorella:

Go ahead. Why don't you do that?

Anthony Geraci:

I'll give you the first one. Yeah. And so Jerome Grossman asked California Corporations code section 25 18 does not specify that the borrower must be a California entity. Is there case law holding that?

Melissa Martorella:

It's actually in that section. So I, I'm happy to Jerome, if my email address is here, if you'd like to reach out to me directly, I can provide you the actual citation that includes the reference to a California entity.

Anthony Geraci:

Awesome. Gregory asked attorney converts past due balance to a promissory note secured by first due to trust with interest at 12% Urus, even though prior invoices before conversion and noted due of trust provided for a 12% interest on past due balances. That's a tricky one and the reason why it's tricky is there is a provision for services rendered above the usury rate. It's one of the ones we didn't mention, but there are some exemptions for that. But it would greatly depend on how the note is written. If the note is written, well now this interest will bear 12% that could be held to be usurious. So that would just really depend on how the note was written and what the sign sign what was signed. But if you'd like one of us to look at it, please send us an email myself or Melissa, happy to take a look at it and figure out what case if any you have there. Next

Melissa Martorella:

One. And I was able to get the open <laugh> I know worked on it there. So Chink asks, what are late payoff penalties are those governed by US laws? So this is something that I get all the time is, hey, on the maturity date I want to charge. If they don't pay on that day, I want to charge a huge penalty. I want to either charge default interest on that whole amount, I want to charge a late fee on that whole amount, whatever it is. Unfortunately those things are definitely prohibited in California. They're either under an analysis of late charges or usury or a combination of both. But generally you cannot charge a giant fee or a late charge at the loan. Payoff prohibited in California to do that and most states to charge, especially a late charge on a balloon payment it's just not going to be enforceable. Whether your borrower knows that and is savvy enough to bring that up, that's another story. But I do know many lenders that will leave those provisions in there as negotiable points when that majority date comes up. But if it is something that people are pressing on, I would definitely say, oh no worries, we'll waive that because it is something that is unenforceable in California and in most states.

Anthony Geraci:

So what must a broker do to constitute brokering? Well that is the $64,000 question and I'll start breaking it down by how the exemption is worded. So a real estate broker is exempt if they make or arrange the loan. And so that there's been case law that holds that a broker, that broker ordering loan documents and interviewing the borrower is sufficient to be making or arranging the loan. So that would be enough to do. So there's a low standard, but it's still a standard that has to be met, if you will. The broker has to be involved. And again, I emphasize guys, a broker must be involved, not a salesperson. Real estate broker's license must do so. Now of course within brokers in California especially a corporation could be licensed as a broker and a salesperson can act as an authorized representative for the broker, that's sufficient. But then of course the corporation has to be paid, not the salesperson directly. Now if you want to add anything on that one, Melissa,

Melissa Martorella:

No, I mean that's the big picture. Who's the person talking to the borrower negotiating the terms, that whole thing. They really need to be acting as a broker throughout the transaction for it to count as brokering. Yeah. Anthony, would you like to take Gregory's follow up question here? Absolutely.

Anthony Geraci:

Authority for loan is void is a matter of law. My understanding was that the only interest provision provision is void. Yes and no. And let me say that effectively what's going to happen is yes, that interest provision is void, but by law what happens is the entire is void and then you have rights to pursue it. So you have the ingest enrichment that we were talking about. You can go sue under your loan documents, but if you, it is proved to be usurious your loan and you go try to enforce a foreclosure that's going to be unwound immediately If you do not go through the courts or if at least you don't go through a settlement and make a good loan, I'm just saying what that means is you're just opening yourself up to another lawsuit

Melissa Martorella:

From Brian. Under what circumstances do you need a finance lender license if you already have a California real estate broker license? This is a great question. For usury purposes, there's no real distinction. So if you're exempt as a DRE broker, you know don't also need a California finance lender license. However, based on the types of loans you're originating in your business model, it may make sense to convert over to a California finance lender license. In particular if you're doing construction loans with large, that may be a reason to go over for that license. And if you want to walk through that, I'd be happy to talk to you about that in depth. But for specifically to usury in California, it really doesn't matter between the two of you are relying on one or the other you wouldn't need to convert to another one for usury purposes.

Anthony Geraci:

Makes sense. And Nebraska, to answer this question next do you look at amortizing the points over the term of the loan for purposes of the 10% usury law i e charging 9% and three points for a four year loan? Is that okay, Melissa?

Melissa Martorella:

Oh, I'm sorry. Where did that come from?

Anthony Geraci:

It's in our chat actually. So it's hard. It's been a while since I've looked at that technical, so I thought you might know better than me. You look at the amputation, the points over the term of the loan is the question

Melissa Martorella:

For the 10%. Yeah, exactly. Yes. Can't sorry about that. I was like, where is this question coming from? Yes, you can do that. I would prefer, I mean it's tough because if they end up repaying the loan early you might have an issue there where yeah, it might've been a four year loan in four years you might've been okay, but if they pay it off early and they paid that percentage interest rate plus all of those points up upfront, technically you have a problem. But at the same time, if they've repaid you and there are no other issues, is there going to be a lawsuit unclear. But generally that's why I recommend including a broker or licensed lender if you're licensed on the transaction. Just so that you get around that kind of a scenario.

Anthony Geraci:

Question is do any other usury caps apply post origination specific to the note purchaser? And that's a good question cause I think the key there you're saying is no pur purchaser usre is what we call a strict liability aspect. So if usre is on its face, which it always should be because usre can be either calculated if you only have payments or usre is on its face as far as interest rate, the note buyer's still be held to the same standards as the originator would be. If you could trace the exemption now back to the originator, that could work. So if you buy a loan from a DRE licensed person, then of course it's usury at the origination, therefore it's, or it's not usurious at the origination, therefore it's not usurious at the purchase. But that definitely has to be lined up and all of your exemptions should be documented as a result.

Melissa Martorella:

Next question here from David, are extension fees included in the calculation for user? This is a wonderful question. We get this all the time. If you negotiated a conditional right to extension and there are points for that extension at time of origination, so say you're an unlicensed lender, but you have a broker arranging that loan transaction, so you're exempt from usury and as part of that negotiation for that loan you've said, Hey, at the end of this term I'm willing to offer you a six month extension for 1% or whatever it is that because it's negotiated by that broker up front, we argue that would be exempt from Mery because it was at the time of an origination at the time of the original loan. However, if that is not at the outset of your loan and it's not in your loan, your original loan documents and you decide later on you're an unlicensed lender, you had a broker at origination, but then you're just working directly with that borrower and it's coming upon maturity and you say, Hey, yeah, I'll give you a six month extension for two points, but that would push you over that usury cap.

There's a strong argument here that you probably should have had a broker arrange that to get to make sure that that was exempt. So that is kind of the issue that we do see. So if it's something where you do typically charge extension fees and are willing to provide a conditional extension at the end of the loan term, there's no default, we can put a lot of language in there. It's something that I would definitely negotiate upfront and put in your documents. It's at lender's discretion, so you know, don't have to give it upon maturity, but it's something good to make sure that those points that you would be charging for the extension are included.

Anthony Geraci:

And then we have anonymous person would interest penalties levy as part of the forbearance agreement count towards usury. And I absolutely love this question because it highlights if you will, the difference between the original document, which is the no whatever one document that is, and now you have this new document that's the forbearance agreement and the question is do interest penalties count toward user? And the answer is any independent analysis. So if you have new interest, it's really not just a forbearance agreement. If you are adding interest or adding penalties that are not as part of the note, you're really modifying the terms of that note and any modification is going to require another real estate broker to negotiate it or some other exemption from the usury. It's an independent analysis under that and case law is held if you do not have that as part of the forbearance or in this case, as I said, really it's a loan modification, then the modification of usury is as well.

Melissa Martorella:

Right. The next question here is have you seen the borrower granted the trouble damages in a usury claim against a lender after it's proved in court? So thankfully I do not litigate, so I have not seen that <laugh>. Anthony, I don't know if you've actually ever seen this happen.

Anthony Geraci:

I've seen a few cases, nothing in my career. And again, that's because on its face, yes. Can you say that someone did intentionally lend the amount of money? Yes, but is anybody intentionally aware of usury loss and saying, you know what, we're just going to lend anyway despite injury. Think about just the proof necessary to prove that in front of a court. So I mean, I don't know anybody who said this, usually law seems really good to violate, let's just go ahead and do it anyway. Usually what'll happen is the trouble damages was part of Ricoh stuff I think before Ricoh came about. And so you really had, I think this was the history of it, but I haven't read it a long time, was people strong arming money out of people for rates and they would use this and tie this to criminal action too. But I've not seen that as a result in a long, long time. So

Melissa Martorella:

Awesome. Another question about forbearances. If a forbearance agreement does not amend the note, is that seen as a separate agreement? If there are penalties or interests that are part of that agreement that exceed 10%, might that be user, I think Anthony just answered this, you know, have to look at it as a separate kind of transaction. If you are technically charging rates as part of that forbearance agreement that could be considered usury is. So I would definitely, before you enter into something like that, talk to somebody, reach out, we can walk you through that and give you a good analysis as to whether you're okay or not.

Anthony Geraci:

Yeah, and it's asked twice. I really want to drill down just briefly on this, you know, have this title forbearance agreement, but I want to make sure everybody understands what a forbearance agreement is. Forbearance agreement is your for bearing on rights you already have. So you could foreclose or you've already earned this interest rate or penalty or what have you, and what in lieu of doing that you are going to do something else for me, whatever that may be. I'm going to wait on foreclosing on you if you do Y or X or whatever that is, that's a forbearance agreement because of your for bearing on the original terms of the note, if you have a modification agreement, if you're modifying the terms of the no, that could be your forgiving principle or you're adding principle depending on what's going on. That's really modifying the terms or any terms of the agreement.

And those are two very distinct things on a forbearance agreement. Since you're not adding anything new, then there's no really separate analysis as far as usury goes, but anything that changes your original rights in a contract is definitely modification. So I just want to spend a smart time on that one. So you guys understood that one. What if we do a month-to-month short-term bridge loan? Can we do 2% a month? Assuming there's an extension for you, you can for sure but just short term bridge loan without an exemption, that still would be covered under usury because it's still interest.

Melissa Martorella:

Yeah, and depending on how high that monthly interest rate is, even though remember we have that unconscionability argument, even though you might be exempt from usury, if this ends up being a really high interest rate, it may be problematic from an Unconscionability standard. So I maybe not <laugh>, but we could talk about it and see the actual terms and see if that's okay. Another question from Brian about extensions. If a loan's at its due date, but as a lender you want to continue with the loan, do you have to document the extension or if you just continue accepting payments, is that okay? I mean I get this all the time because people are like, I don't want to go through the hassle of executing documents, paying for an extension agreement, recording that extension agreement. You really should. It protects your rights. You don't have any waiver arguments because that you waived the maturity date or anything like that.

You know, get a good job, a good agreement in place saying, Hey, we're agreeing to extend the term of the loan record that if necessary do have a problem in your loan transaction. This is a great place to clean it up. So like we were talking about earlier, maybe there's an issue that earlier on you want to release from that. This is a really great opportunity to kind of double check what happened at origination and clean it up. And like I said, it's always better to have a written agreement, even if it's just an extension it'll protect you in the long run.

Anthony Geraci:

Absolutely. Next question, is a fee paid to the broker required to qualify as the broker making the loan? I may take this differently. I think the question is, do you have to pay a fee to the broker to qualify as the making arrangement the loan? So I'm going to give you the best practice and my answer is you absolutely should pay something. Because again, think of it as far as litigation goes, I have to go proof of the judge that this was made arranged by a broker and I don't know, something easier to prove that, hey, here's the check they got paid. The term of the actual term of the law though says compensation must be paid directly or indirectly. And as you guys can imagine directly makes a lot of sense. I can prove that very easily. Indirectly I'd make an argument to either a judge or a jury about what that is. And is that sufficient to constitute making or arranging the loan? I mean, because of the sheer penalty of a usury loan, I pay them something. I'm not saying you got to pay them the full points of the loan assuming you can get points and comp, be compensated for other analysis, but pay them something, even if it's a hundred dollars or $500 or a thousand dollars, some money should be traded to the broker. There's no analysis about, well is the compensation sufficient analysis? Were they compensated?

Melissa Martorella:

Absolutely. And then I have one last question here, unless another pops up. How about short term loans of property flippers? Are they subject to usury as well? An llc loaning to an llc? So unless you qualify under that corporate code exemption that we talked about, lending a certain California based entities and you know comply with all of those requirements, yes there is no exemption for these types of loans in California specifically. You either need to be licensed as a DRE broker or as a cf, a California finance lender to be exempt from usury. There's nothing specifically about these kinds of loans that would exempt you from usury in California, unfortunately.

Anthony Geraci:

What if the extension agreement was drawn by servicer like fci? Do you know if they qualify as brokering? Gosh, that is a loaded question and I would probably take that offline to understand this. Now we're getting into nuanced facts that may or may not work and the questions I'm looking at is, was FCI compensated to broker and make her arrange that necessarily extension agreement or were they acting as just a documentary capacity? So that would be the question that we'd have to ask. And unfortunately now we're getting more nuanced. I can't just give you a yes or no question, unfortunately. I have to use that old adage of it depends, and I'm sorry because we're not those type of people, but it really does depend on the facts of that particular case.

Melissa Martorella:

Awesome. Well, I think that's it. These are all the questions that we've gotten here today. Thank you all for joining us. It has been a pleasure. As always. I think this is our last webinar for the year, so thank you. Happy holidays. I hope you all get to spend some time with family and friends and we will see you in the new year for some new updates and some new information. Thank you.

Anthony Geraci:

Thank you guys so much and stay safe out there. I know it's crazy times. If we can be a resource to you in any way, reach out. Happy to connect you. Even if you don't use us, if there's some one we can introduce you to or be helpful to you, reach out. We're happy to help anyone any way we can. Take care.