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In an April 16 unpublished opinion, the U.S. Ninth Circuit Court of Appeals affirmed the Bankruptcy Appellate Panel’s earlier decision finding that a mortgage lender not licensed in California violated the state’s usury law when it extended the term of the loan and lowered the borrower’s interest rate on a broker-arranged mortgage loan that it owned. 

The original loan had been exempt from California’s usury law under an exception in California Civil Code section 1916.1 that allows lenders not licensed in the state to provide loans in California that are not subject to the usury law if they use a licensed real estate arrange the loan. Since a real estate broker did not arrange the modification, the court held that the modification, which lowered the borrower’s interest rate to 11.3%, violated California’s usury law, which in general characterizes as usurious any loans with interest rates that exceed 10%.

Putting it into Practice: Mortgage lenders that are licensed under any of California’s three licensing vehicles (California finance lender, residential mortgage lender or real estate broker) are exempt from California’s usury law. For unlicensed lenders considering modifying a loan that was originally exempt under Section 1916.1, the best approach might be to leave well enough alone, or consider rewriting the loan with the assistance of a licensed real estate broker.