Many states have passed laws establishing the maximum rate of interest that can be charged on various types of loans. Interest rates that exceed the maximum rate are considered usurious and therefore illegal. In some instances if a tender is found guilty of usury, the borrower would not have to pay any interest!

♦ Maximum Rate - In California the maximum rate for loans secured by real property is the greater of 10% or 5% above the Federal Reserve Bank discount rate, unless the lender is exempt from the law.

♦ Exemptions - California regulations exempt from the usury law Institutional lenders such as banks, thrift institutions, and life insurance companies. Also exempt from usury laws are noninstitutional lenders including mortgage companies, credit unions, personal property brokers, owners who carry back paper when they sell, and any transaction that uses a real estate broker. However, direct private lenders are not exempt. For example, real estate loans from regulated Institutional lenders can be at any rate, whereas an actual direct hard money real estate loan (not a seller carryback loan) from a private lender is not exempt, unless a real estate licensee is handling the transaction.

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