Last Updated: July 9, 2008
California's usury laws, contained in Article XV, Section 1 of the California Constitution, regulates the maximum amount of interest which can be charged on any loan or forbearance of money. Pursuant to California law, individuals and businesses (other than licensed lending institutions and pawnbrokers) can charge a maximum of: (i) 10% interest per year for money, goods or things used primarily for personal, family or household purposes and (ii) for other types of loans (home improvement, home purchase, business purposes, etc.), the greater of 10% interest per year or 5% plus the Federal Reserve Bank of San Francisco’s discount rate on the 25th day of the month preceding the earlier of the date the loan is contracted for or executed. California courts have deemed "interest" to include anything of value that is received directly or indirectly by the lender from the borrower regardless of the nature or form of the consideration-such as fees, bonuses, commissions, and other miscellaneous charges.
So When Is A Loan Usurious?
A loan will be deemed to be usurious when the interest charged exceeds the maximum amount prescribed by law. The lender's knowledge is immaterial. The plaintiff need not prove intent, and failure to know the law is no defense.
So What Happens If A Loan Is Deemed Usurious?
If a loan is deemed to be usurious, the borrower is generally entitled to the following cumulative remedies:
- the borrower can bring an action for money damages for the money he has previously paid during the two year period prior to the filing of an action;
- the borrower can recover damages equal to three times the interest paid during the one year period prior to the filing of a lawsuit;
- the borrower can get a judgment to cancel all future interest that will become due for the remainder of the term of the loan; and
- in appropriate cases, where the lender's conduct is oppressive, fraudulent or malicious, the borrower may be able to recover punitive damages.
Additionally, any violation of the usury laws may also be a violation of Business & Professions Code § 17000, et. seq., which would expose the lender to criminal liability. The result is that a usurious loan may turn into an interest free loan and subject the lender to potentially costly damages and potential criminal liability.
What about the principal? Even if a loan is deemed to be usurious, the lender is still entitled to receive the principal back and to retain any security for the loan.
A simple loan can turn into a disastrous event, even if there was intent to violate the usury laws. Before borrowing or, more importantly, lending money, consider the impact of the usury laws on the transaction. A little bit of planning and forethought can prevent hefty legal bills and headaches. If you are a borrower, you should examine all loans received from non financial institutions to determine whether the usury laws can be used for your economic benefit.