Chapter 58: Usury and the private lender

What is usury?

A limit on the lender's interest rate yield on nonexempt real estate mortgages.

What are treble damages?

A usury penalty computed at three times the total interest paid by the borrower during the one year period immediately preceding their filing of an action on a nonexempt private lender mortgage.

What are restricted real estate loans?

All mortgages made by private party lenders which are neither made nor arranged by a real estate broker.

Mortgages made to fund the improvement, construction, or purchase of real estate when originated by a non-exempt private lender are subject to a different usury threshold rate, which is the greater of (2):

1.) 10% per annum; or 2.) applicable discount rate of the Federal Reserve Bank of San Francisco (FRBSF), plus 5%.

Chapter 58 Learning Objectives (4):

1.) determine which lending arrangements are subject to or exempt from usury restrictions on interest rates 2.) identify extensions of credit on property sales as excluded from usury restrictions 3.) discern when the usury threshold rate applies; and 4.) explain the penalties imposed on a non-exempt private lender on violations of usury law

Private party transactions involving the creation of a debt which avoid usury laws break down into two categories (2):

1.) exempt debts - debts which involve a mortgage or a forbearance on a mortgage and are broker-made or arranged; and 2.) excluded debts - debts which do not involve a mortgage

Brokered real estate mortgages are exempt from usury restrictions and fall into one of two categories (2):

1.) mortgages made by a licensed real estate broker acting as a principal for their own account as the private lender who funds the mortgage; or 2.) mortgages arranged with private lenders by a licensed real estate broker acting as an agent in the mortgage transaction for compensation.

Other types of lenders exempted from usury law restrictions include (7):

1.) savings and loan associations (S&Ls); 2.) state and national banks; 3.) industrial mortgage companies; 4.) credit unions and pawnbrokers; 5.) agricultural cooperatives; 6.) corporate insurance companies; and 7.) personal property brokers

Chapter 58 Key Terms (4):

1.) usury 2.) exempt debt 3.) excluded debt 4.) treble damages

What is excluded debt?

Extensions of credit by sellers of real estate creating a debt obligation in sales transactions which avoid usury laws.

What is exempt debt?

Private party transactions exempt from usury laws involving the origination of a mortgage secured by real estate and made or arranged by a real estate broker.

Today, the remaining goal of usury laws is? Loan-sharking involves charging interest at a higher rate than the ceiling-rate established by the usury laws. These mortgages are categorized as usurious

the prevention of loan-sharking by private lenders.

Two basic classifications of private mortgage transactions exist relating to interest rates private lenders may charge on real estate mortgages:

• brokered real estate mortgages; and • restricted or non-brokered real estate mortgages.