From: Spencer Scheer, Scheer Law Group, LLP
To all SLG Clients and Affiliates.
Subject: Recent Appellate Case: Borrower Challenges Mortgage Broker Usury Exemption. Lenders and Brokers take Note.
Borrowers often assert usury defenses to enforcements of loans. Most attempts are unsuccessful, as there are a wide variety of exemptions that allow loans over the legal rate of interest to be made by almost anyone except an individual.
One of the most common exemptions is found in Civ. Code § 1916.1, which exempts from usury, loans arranged by a broker for another for compensation or in anticipation of compensation. Some California cases had previously held that where a broker did nothing more than just fill out the paperwork for a relative and did not receive compensation, or the broker although involved in the transaction, participated as a joint venturer or partner with a lender that made the loan, that the exemption did not apply.
The case ofBock v. California Capital Loans, Inc., 2013 Cal. App. LEXIS 426 (Cal. App. 3d Dist. May 20, 2013) gives brokers and lenders who use them a little more breathing room to claim the exemption, even where the Broker has a direct interest in the lender that funded the loan.
In the Bock case, the broker (Bock) arranged a loan to his wholly owned corporation (California Capital) that would be deemed usurious if not subject to the broker exemption. The court held that a corporation is a separate legal entity so the loan was arranged for another. Even though Bock did not receive a commission, the Court found that Bock expected compensation (in the form of interest that his corporation would obtain) and so the loan was arranged with expectation of compensation. Accordingly, the exemption stood.
The case is important to brokers and lenders when a loan is arranged by a broker, who participates in the loan with the lender (either directly as a lender or indirectly, as in this case , through the broker’s wholly owned corporation). Both parties (broker and lender) must consider whether the broker participation in the loan will override the broker usury exemption and if so, how to structure the loan to line up with the protections of the Bock case.
Please contact Spencer Scheer if you have any questions
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