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California Court Explicates Scope of Usury Exemption For Real Estate Brokers

Artistotle didn’t think much of the idea of paying interest:

 εὐλογώτατα μισεῖται ἡ ὀβολοστατικὴ διὰ τὸ ἀπ᾽ αὐτοῦ τοῦ νομίσματος εἶναι τὴν κτῆσιν καὶ οὐκ ἐφ᾽ ὅπερ ἐπορίσθη. μεταβολῆς γὰρ ἐγένετο χάριν,  ὁ δὲ τόκος αὐτὸ ποιεῖ πλέον (ὅθεν καὶ τοὔνομα τοῦτ᾽ εἴληφεν: ὅμοια γὰρ τὰ τικτόμενα τοῖς γεννῶσιν αὐτά ἐστιν, ὁ δὲ τόκος γίνεται νόμισμα ἐκ νομίσματος: ὥστε καὶ μάλιστα παρὰ φύσιν οὗτος τῶν χρηματισμῶν ἐστιν.  (“As this is so, usury is most reasonably hated, because its gain comes from money itself and not from that for the sake of which money was invented.  For money was brought into existence for the purpose of exchange, but interest increases the amount of the money itself  (and this is the actual origin of the Greek word: offspring resembles parent, and interest is money born of money); consequently this form of the business of getting wealth is of all forms the most contrary to nature.”)

Aristotle, Politics, Book 1, § 1258b (translated by H. Rackham).

William Blackstone, on the other hand, saw it as a necessity for modern commerce:

Thus, in the dark ages of monkish superstition and civil tyranny, when interest was laid under a total interdict, commerce was also at it’s lowest ebb . . . but when men’s minds began to be more enlarged, when true religion and real liberty revived, commerce grew again into credit; and again introduced with itself it’s inseparable companion, the doctrine of loans upon interest.

Commentaries on the Laws of England, Book II, Ch. 30.

California permits the charging of interest, but the Constitution limits the amount of interest that may be charged.  Cal. Const. Art. XV.  Not all loans, however, are subject to these constitutional rate limitations.  For example, the Constitution exempts “loans made or arranged by any person licensed as a real estate broker by the State of California and secured in whole or in part by liens on real property.”   Civil Code Section 1916.1 further explicates this exemption by providing that “a loan . . . 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 a loan for another.”

In a decision handed down this week, the California Court of Appeal considered whether a loan made by a wholly-owned subsidiary of an individual licensed as a real estate broker was within exemption.  Bock v. California Capital Loans, Inc., 2013 Cal. App. LEXIS 376 (May 14, 2013).  The borrower made two arguments – the loan was not arranged “for another” and the broker had not arranged the loan “in expectation of compensation”.  Justice Ronald B. Robie, writing for the court, rejected both of these arguments.

© 2010-2022 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume III, Number 138

About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...