A private lender in California charges exactly 10% interest on an unsecured personal loan. The current SF Federal Reserve discount rate is 7%. Is this loan usurious?
Correct Answer
A) No, because the usury ceiling is the greater of 10% or 5% + 7% = 12%, and 10% is below 12%
The usury ceiling is the GREATER of 10% or 5% + the Fed discount rate (7%) = 12%. Since 12% is greater than 10%, the ceiling is 12%. The lender's 10% rate is well below this ceiling, so the loan is not usurious.
Why This Is the Correct Answer
The usury ceiling is the GREATER of 10% or 5% + the Fed discount rate (7%) = 12%. Since 12% is greater than 10%, the ceiling is 12%. The lender's 10% rate is well below this ceiling, so the loan is not usurious.
Why the Other Options Are Wrong
Option B: Yes, because 10% exceeds the constitutional limit
10% does not exceed the constitutional limit because the floating component (5% + 7% = 12%) has raised the ceiling above 10%.
Option C: No, because 10% does not exceed the usury ceiling of 12%
While the conclusion is correct (not usurious), this answer misstates the reason; the ceiling is 12% because of the formula, and 10% is indeed below it, but the reasoning must reference the correct formula.
Option D: Yes, because the usury limit for unsecured loans is 7%
There is no separate 7% limit for unsecured loans; the Article XV formula applies regardless of whether the loan is secured or unsecured.
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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