A California MLO is advising a private investor who wants to fund a loan at 11% interest. The loan will be secured by vacant land. No broker is involved. The current SF Federal Reserve discount rate is 4%. What should the MLO advise?
Correct Answer
D) The rate is usurious because it exceeds the 10% ceiling and no exemption applies
The usury ceiling is MAX(10%, 5%+4%=9%) = 10%. The 11% rate exceeds 10%. The private investor is not an exempt lender, no broker is arranging the loan, and vacant land security alone does not create an exemption. The loan is usurious.
Why This Is the Correct Answer
The rate is usurious because it exceeds the 10% ceiling and no exemption applies is correct. The usury ceiling is MAX(10%, 5%+4%=9%) = 10%. The 11% rate exceeds 10%. The private investor is not an exempt lender, no broker is arranging the loan, and vacant land security alone does not create an exemption. The loan is usurious. The usury ceiling is MAX(10%, 5%+4%=9%) = 10%. The 11% rate exceeds 10%. The private investor is not an exempt lender, no broker is arranging the loan, and vacant land security alone does not create an exemption. The loan is usurious.
Why the Other Options Are Wrong
Option A: The rate is permissible because vacant land loans are exempt from usury
Vacant land loans are NOT exempt from usury; the exemption requires a licensed broker's involvement, not merely real property security.
Option B: The rate is usurious because it exceeds the 9% ceiling (5% + 4%)
The ceiling is 10% (the greater value), not 9%. While 11% exceeds both, the stated ceiling of 9% is incorrect.
Option C: The rate is permissible because it is below the standard 12% private lending cap
There is no standard 12% private lending cap in California; the constitutional formula determines the ceiling.
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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