Real Estate Principles: Chapter 58: Usury the private lender

Real Estate Principles: Chapter 58: Usury & the private lender Flashcards excluded debtExtensions of credit by sellers of real estate creating a debt obligation in sales transactions which avoid usury laws.treble damagesA 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 non- exempt private lender mortgage.SummaryThe amount of interest a private, non-exempt lender can charge a borrower is regulated by the California Constitution and statutes, collectively called usury laws.Mortgages made or arranged by a California real estate broker are exempt from usury restrictions. Further, sales transactions involving the extension of credit by a seller are not subject to usury laws.Non-exempt mortgages made to fund the improvement, construction, or purchase of real estate are subject to an interest restriction of 10% annually or the current discount rate of the Federal Reserve Bank of San Francisco plus 5%, whichever is greater.Penalties for violating usury law include the forfeiture of all interest on a usurious mortgage. Lenders who are found to have taken grossly unfair advantage can also be penalized with treble damages.restricted real estate loansloans All mortgages made by private party lenders which are neither made nor arranged by a real estate broker.exempt debtPrivate party transactions exempt from laws usury involving the origination of a mortgage secured by real estate and made or arranged by a real estate broker.usuryA limit on the lender's interest rate yield on nonexempt real estate mortgages.

IntroAfter reading this chapter, you will be able to:determine

which lending arrangements are subject to or exempt from usury restrictions on interest rates;identify extensions of credit on property sales as excluded from usury restrictions;discern when the usury threshold rate applies; andexplain the penalties imposed on a non-exempt private

lender on violations of usury law.Key Terms: exempt debt,

treble damages, excluded debt, usury, restricted real estate loans.For a further study of this discussion, see Chapter 43 of Real Estate Finance.When a mortgage is made, the lender charges the borrower interest for use of the money during the period lent.However, the amount of interest a

private, non-exempt lender can charge is regulated by statute and the California Constitution. Collectively, these are referred to as usury laws.'Today, the remaining goal of usury laws is the prevention of loan-sharking by private lenders. Loan-sharking involves charging interest at a higher rate than the ceiling-rate established by the usury laws. These mortgages are categorized as usurious.Usurary exemptions spur competitionAdopted in 1918 as a consumer protection referendum, the first Califormia usury laws set the maximum interest rate at 12% for all lenders - no exceptions.During the Great Depression, California legislation exempted certain types of lenders from usury restrictions. The exemptions were implemented with the intent to open up the mortgage market.These exemptions to usury laws remain in place today and more have been added. For example, in 1979, mortgages made or arranged in California by real estate brokers were exempted from usury restrictions.Other types of lenders

exempted from usury law restrictions include:savings and

loan associations (S&Ls);state and national banks;industrial mortgage companies;credit unions and pawnbrokers;agricultural cooperatives;corporate insurance companies; andpersonal property brokers.Exemptions successfully opened the market by increasing the availability of funds. In turn, interest rates were soorn driven lower due to increased competition.