A private party lender in California makes a $200,000 loan to a borrower secured by a second deed of trust. The lender is not a licensed broker and charges 12% annual interest. The current SF Federal Reserve discount rate is 3%. Which statement is TRUE?
Correct Answer
A) The loan is usurious because the rate exceeds the constitutional limit of 10%
The usury limit is the greater of 10% or 5% + 3% (Fed rate) = 8%. Since 10% is greater, the ceiling is 10%. At 12%, the loan exceeds this limit. The lender is a private party (not exempt), and simply being secured by real property does not create an exemption without a licensed broker arranging the transaction.
Why This Is the Correct Answer
The usury limit is the greater of 10% or 5% + 3% (Fed rate) = 8%. Since 10% is greater, the ceiling is 10%. At 12%, the loan exceeds this limit. The lender is a private party (not exempt), and simply being secured by real property does not create an exemption without a licensed broker arranging the transaction.
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