Usury refers to an illegal surcharge of interest on a borrower’s debt. Article 15 of California’s Constitution states that any loan used primarily for personal or household purposes cannot exceed an annual interest rate of 10%. It is illegal for lenders to charge interest above the federally mandated maximum rate.
Usury laws apply to individual loans and forbearances/deferments.
The following are generally exempt from California’s usury laws:
licensed lending institutions (i.e. banks, credit unions, financial companies)
loans funded for the purpose of development or construction programs
loans originating through brokers
Real estate agents are not exempt from usury laws.
Points and fees are calculated when determining whether a lender charged a usury interest rate on the loan provided. Lenders who knowingly charge usurious interest rates are subject to severe penalties. If a rate is found to be usurious, a borrower can:
bring forward a legal suit to recover damages
recover a large amount equaling up to 300% of the interest paid for a maximum 12-month period
void the interest portion in a loan contract entirely
What is Unreasonably Expensive
When a loan or financial product is unreasonably expensive, it is considered usurious. While the market has the ability to change interest rates, lenders cannot charge an interest beyond what is reasonable. For example, if the prime interest rate is 6%, lenders cannot charge 22% for the loan. This charge is beyond what is reasonable for a mortgage rate. If a borrower signs a loan with such unfair provisions, they will likely succeed in court in voiding the contract.
Lenders have the ability to charge higher interest to riskier borrowers that have lower credit scores and income documents, however they cannot make it overly burdensome compared to standard rates simply because of their financial history. It is generally considered acceptable for lenders to charge 20-30% higher interest to borrowers with low or bad credit. Fees that surpass this are beyond unreasonable and will therefore will be considered usurious.