It is a fundamental policy of the State of California that any party engaging in a non-exempt loan transaction must comply with the state law that limits usury. In many cases, a party accused of usury defends a transaction’s usurious interest rate by asserting that the type of transaction is exempt or that the party’s status as a lending party makes it subject to a class-wide exemption. As to the latter, what entities are exempt from the California usury law?
To recap, a transaction is usurious if there is a loan at greater than the legal rate of interest or an exaction at more than the legal rate for the forbearance of a debt or sum of money due. Ross v. Wheeler (1934) 140 Cal. App. 217, 223. Aside from this fact, there is a presumption in California that a transaction is not usurious.
There are many exemptions under California law and most are class-wide exemptions allowed by California statute and the California Constitution. Some of these include:
- California banks; licensed foreign banks and foreign banks with assets of over $100 million. (Cal. Fin. Code § 1716);
- Bank holding companies and subsidiaries. (Cal. Fin. Code § 3707);
- California and federal banks, savings and loan associations, and credit unions. (Cal. Const. art XV, §1);
- Federal and California savings and loan associations, and their holding companies and subsidiaries. (Cal. Fin. Code § 7675);
- Trust companies and California and national banks acting in a fiduciary capacity. (Cal. Fin. Code § 1504);
- Admitted incorporated insurers. (Cal. Ins. Code § 1100.1);
- Physicians cooperative indemnity institutions. (Cal. Ins. Code § 1280.7 (a)(4);
- Finance lenders and brokers. (Cal. Fin. Code § 22002); and
- Licensed brokers and industrial development corporations. (Cal. Fin. Code § 31410).
Generally, our state’s usury laws do not apply to bonds issued by a state or local government. The usury laws also do not apply to licensed securities broker-dealers acting pursuant to an effective, unexpired certificate. The usury laws also do not apply to corporations or associations engaged exclusively in the business of marketing agricultural, horticultural, and viticultural products on a cooperative nonprofit basis when lending to members or when securing credit from a federal intermediate credit bank.
Thus, California’s usury laws do not apply to loans made by most depository financial institutions such as banks, savings and loan associations, and credit unions. The usury laws also do not apply to loans made by insurance companies. Although there are a multitude of exemptions, determining whether an entity qualifies for a particular one may not be clear or straightforward.
Consulting with experienced counsel is the best course of action in this situation since the penalties for violating the law may be severe and costly. Lenders may circumvent the limitations of California’s usury law by obtaining a license under the California Financing Law and following all of its rules and regulations.
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