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Broker-Arranged Exception to Usury Laws Interpreted by Court; Lender Lost and Forced to Forfeit All Interest

By: Karla N. MacCary

The "broker-arranged" exception is frequently relied upon by lenders to exempt themselves from California’s usury law. On October 22, 2004, the Court of Appeal, in Gibbo v. Berger (October 25, 2004, E035201) [2004 DJDAR 12945] issued an opinion defining those activities of a broker which constitute "arranging" a loan for purposes of an exception to the usury laws. The broker acted as an escrow agent and prepared loan documents based on terms provided by the parties, all for a $100 fee. This was found not to be "arranging the loan," and thus the loan, with a 15% interest rate, was held to be usurious. The lender was ordered to return all monies received from the borrower in excess of the principal amount of the loan, and the court of appeal remanded to the trial court to determine if treble damages should be awarded.

Under the California usury law, found in Article XV, Section 1 of the State Constitution, unless exempt from the usury laws, parties may not contract for a loan with a rate of interest in excess of the higher of (i) 10% per annum, or (ii) 5% above the rate established by the Federal Reserve Bank of San Francisco on advances to member banks. Violation of California’s usury laws may result in, among other things, forfeiture by the lender of all interest, recovery by the borrower of treble damages applicable to interest paid in the prior year, and an inability to declare the debt due until the full period of time it was contracted for has elapsed.

There are several exceptions to California’s usury law, including loans made by national banks, California banks, and foreign (other state) banks, licensed California Commercial Finance Lenders and licensed California real estate brokers. Nevertheless, lenders frequently find themselves eager to make a loan but the lender does not fall within any of the classes of exempt lenders. One of the exemptions lenders often turn to in this circumstance is the "broker-arranged" exception.

In 1983, the California Legislature elaborated on the constitutional broker exception to the usury law, in Section 1916.1 to the Civil Code. Section 1916.1 reads in relevant part:

"The restrictions upon rates of interest contained in Section 1 of Article XV of the California Constitution shall not apply to any loan or forbearance made or arranged by any person licensed as a real estate broker by the State of California, and secured, directly or collaterally, in whole or in part by liens on real property. For purposes of this section, a loan or forbearance is arranged by a person licensed as a real estate broker when the broker acts . . . for compensation or in expectation of compensation for soliciting, negotiating or arranging the loan for another. . . The term ‘made or arranged’ includes any loan made by a person licensed as a real estate broker as a principal or as an agent for others, and whether or not the person is acting within the scope of such license."

For years, courts and commentators have agreed that the meaning of "arranged" is unclear. The cases discussing the exemption focus on either or both of the following issues: (1) whether the broker acted for compensation or in expectation of compensation, and (2) whether the broker’s activities constitute "arranging" a loan. The Gibbo court’s discussion focused on the meaning of "arranging" a loan. The court stated:

"When viewed in the context of ‘arranging a loan,’ the phrase ‘arranged by’ must refer to some conduct by a real estate broker, acting as a third party intermediary rather than as a party to the loan, that causes a loan to be obtained or procured. Such conduct by a broker includes structuring the loan as the agent for the lender [cite]; setting the interest rate and points to be paid, setting the terms of the forbearance agreement, reviewing the loan and forbearance documents, conducting title searches, or drafting the terms of the loan [cites]."

The importance of Gibbo is that, in order to take advantage of the broker-arranged exception, it is not sufficient to just have a broker involved in some capacity. The broker’s role needs to be substantive and interactive, such as putting the lender and the borrower together and negotiating the terms of the loan.

Lenders should also be aware of California Corporations Code Section 25118, enacted in 2000, which creates a new class of exempt loan for non-consumer loans. Generally under that section, a loan other than for personal or household purposes, in the amount of at least $300,000 to an entity with total assets of at least $2,000,000, is exempt from the usury laws if the lender and the borrower or their principals have a pre-existing personal or business relationship, and the lender and the borrower, by reason of their own business and financial experience or that of their professional advisors, could reasonably be assumed to have the capacity to protect their own interests in connection with the transaction. This exception would be applicable to many loans that are not made by banks and other exempt lenders.

Karla MacCary is a Partner in Nossaman’s Real Estate Group. She has over fourteen years of experience in real estate transactional and financing matters. For more information, please contact Karla at (213) 612-7862 or

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