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 loan is usurious because the rate exceeds the constitutional limit of 10% is correct. 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. 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 the Other Options Are Wrong
Option B: The loan is not usurious because it is secured by real property
Being secured by real property alone does not create a usury exemption; the exemption requires a licensed broker to arrange the loan.
Option C: The loan is not usurious because the usury limit does not apply to second trust deeds
There is no distinction in usury law between first and second trust deeds; the usury ceiling applies regardless of lien position.
Option D: The loan is usurious because the rate exceeds the constitutional limit of 8%
While 5% + 3% = 8% is one prong of the formula, the usury limit is the GREATER of that amount or 10%, so the ceiling is 10%, not 8%.
Memory Technique
CA -> ca-usury-real-estate-broker-exemptions-interest-penalties
Exam Tip
Usury questions require separating personal-purpose loans, other-use loans, regulated-lender exemptions, real estate broker arranged real-property loans, and nonexempt private-lender scenarios.
Common Mistakes to Avoid
- -Using a national baseline answer when California has agency-specific DFPI or DRE requirements
- -Confusing CFL, CRMLA, covered-loan, usury, servicing, and DRE endorsement rules
- -Relying on legacy California state-exam or education assumptions instead of current NMLS source pages
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