My parents live in Los Angeles County, California.

In 1986 they took out a $105,000 loan from an individual who I
believe is / was an attorney.  The loan is secured by a deed to my parents
home.

The terms of the loan per the note are:  Interest-only loan at 17%
annually. My parents are still paying interest on this loan twenty
years later, and still owe the $105,000 principal.

Now that they have finally let me into their finances, I'm very
concerened that they have been illegally overcharged.

My questions are:

-Is the 17% interest rate illegal?

-If 17% is illegal, what would the maximum interest rate allowable by
law be for the years from 1986 to the present?

-If 17% is illegal, what "type" of attorney is most familiar with
Usury issues, and be best suited (pun intended) to help me resolve
this?  A Real Estate Attorney?

-Lastly, assuming my parents have been overcharged and are able to
prevail through legal channels, what recourse might they expect?  For
example, would all excess interest payments be applied towards the
principal?

Thanks for your answers!!

Hi markymarc1,

I sympathize with your situation with your parents. Here's what the
law says about the situation:

http://www.lectlaw.com/files/ban02.htm

"CALIFORNIA, the legal rate of interest is 10% for consumers; the
general usury limit for non-consumers is more than 5% greater than
the Federal Reserve Bank of San Francisco's rate."

The key wording there is "more" than 5 percent.

California Attorney General's Office
http://ag.ca.gov/consumers/general/usury.htm

The usual usury restrictions on personal loans are 10 percent yearly,
if payments are not being made on the loan.  However, loans for
housing would not qualify:

"In regard to usury, a loan to be used primarily for home improvement
or home purchase is not regarded as a loan for personal, family or
household purposes. With these loans and for any other loans which are
not for personal, family or household purposes, the allowable rate is
the higher of 10% or 5% over the amount charged by the Federal Reserve
Bank of San Francisco on advances to member banks on the 25th day of
the month before the loan (if the agreement to loan and the actual
lending of the money are in different months, the 25th day of the
month before the earlier event is used)."

So what are the rates charged by the Federal Reserve Bank of San Francisco?

The bank provides them here:
http://www.frbsf.org/banking/data/discount/index.html

and according to their data, the rate on May 21, 1985 was 7.5 percent,
and the rate before that, beginning in 1984, was 8. This means that
the highest allowable rate would be 18 percent before May 21 and 17.5
percent afterwards.

It seems that your parents' lender was indeed a lawyer, and he/she
charged them almost the maximum legally allowable.

As Google Answers cannot provide legal advice and is only meant as a
guideline, I would still contact a lawyer for your parents to ensure
that they have been treated fairly. There could still be some detail
which seems unimportant but that could work in their favor.


Sources:
Article 15 of the California Constitution
http://ag.ca.gov/consumers/pdf/constitution.pdf

Search terms:
usury california
usury limits california
"federal reserve bank of san francisco" discount rate


If you need any additional help or clarification, let me know and I'll
be glad to help you out.

Cheers,
--keystroke-ga

---

Clarification of Answer by keystroke-ga on 20 Jul 2006 14:27 PDT

I realize now, looking at the question, that it's possible I
misinterpreted the loan terms. Was the loan to buy the house or was it
a personal loan that was just secured by the deed to the house? That
would change the answer entirely. Let me know and I'll get back on it!

---

Request for Answer Clarification by markymarcl-ga on 20 Jul 2006 15:09 PDT

Hi Keystroke.

To answer your question, the loan was a "personal loan" that was
secured by the deed to the house.

Thanks.

---

Clarification of Answer by keystroke-ga on 20 Jul 2006 17:05 PDT

All right, well that changes the parameters of the question. Forgive
me for misinterpreting initially.

If the loan is for personal use and not for a home or home
improvement, the allowable interest rate is much lower.

According to the California statutes:

http://ag.ca.gov/consumers/general/usury.htm

"The California Constitution allows parties to contract for interest
on a loan primarily for personal, family or household purposes at a
rate not exceeding 10% per year. As with all other percentages we are
listing, this percentage is based on the unpaid balance. For example,
if a loan of $1,000 is to be paid at the end of one year and there are
no payments during the year, the lender could charge $100 (10%) as
interest. However, if payments are to be made during the year, the
maximum charge allowed could be much less."

In other words, if $100,000 was owed and the first year $10,000 was
paid, the next year the interest charged could only be 10 percent of
$90,000, the unpaid balance left.

According to these statutes, the lender is guilty of usury in this
instance and can be held accountable for it.  (This is, of course,
permitting that the loan is not for a home or home improvement.)  Not
only is the highest allowable interest rate on a personal loan 10
percent, but if payments are made, the amount is even less. There is
another exception that might be applicable:

"The usury laws do not apply to any real estate broker if the loan is
secured by real estate. This applies whether or not he or she is
acting as a real estate broker."

If the lawyer was also certified as a real estate broker, the loan
could be legal. I include this because the loan is secured by real
estate, the deed to your parents' house.

In addition, it's possible that because the loan was secured by a deed
to property that the lender could be legal under an exception in the
statute:

"One type of loan that receives special, indulgent treatment under the
usury laws is a loan secured by real property."
http://www.maldonadomarkham.com/california-foreclosure-law.htm

You'd have to consult with a lawyer to be absolutely certain.  

There are many conflicting stories about what penalties a usurious
lender could face. Here are some of the possibilities:

http://www.methvenlaw.com/Handout_Preforeclosure_sales.html
"If any of these provisions are violated, the equity seller may be
able to rescind the agreement and/or to recover actual damages,
attorneys? fees and costs, and exemplary damages in an amount equal to
the greater of three times actual damages or $2,500. Fraud or deceit
may additionally be punished by a fine of $25,000, by imprisonment in
the county jail or in state prison for not more than one year, or by
both for each violation. Other remedies may apply as well."

Here is an example of a California usury case:
http://www.envoynews.com/nossaman/e_article000323177.cfm?x=b11,0,w

"The lender was ordered to return all monies received from the
borrower in excess of the principal amount of the loan, and the court
of appeal remanded to the trial court to determine if treble damages
should be awarded."

"Violation of California?s usury laws may result in, among other
things, forfeiture by the lender of all interest, recovery by the
borrower of treble damages applicable to interest paid in the prior
year, and an inability to declare the debt due until the full period
of time it was contracted for has elapsed."

Here's another helpful page, from a law firm:

http://www.reish.com/publications/article_detail.cfm?ARTICLEID=517

"A loan will be deemed to be usurious when it can be shown that the
interest charged exceeds the maximum amount prescribed by law,
regardless of whether or not the lender realized that such interest
was usurious. In the event that a loan is deemed to be usurious, a
borrower is generally provided with the following several cumulative
remedies: (1) the borrower can bring an action for money has and
received to collect the past interest paid during the two year period
prior to the filing of an action; (2) the borrower can seek to recover
damages equal to three times the interest paid during the one year
period prior to the filing of a lawsuit; (3) the borrower can recover
a judgment to cancel all future interest that will become due for the
remainder of the term of the loan; and (4); in appropriate cases,
where the lender's conduct is oppressive, fraudulent or malicious, the
borrower may be able to recover punitive damages."

From this, it seems that your parents may only be able to recover the
losses in interest for the past one to two years, but if they file a
lawsuit they could perhaps recover damages equal to the amount of
interest they've already paid. In an alternate situation, it's
possible that the interest they've already paid for 21 years could be
deducted from the principal, or that their interest payments could be
multiplied by three and deducted from the principal.  You'll need to
consult with a good attorney to find out the best method to take and
where to go from here.

A real estate attorney might be a good option, as they would have to
know the limits of usury as far as real estate transactions go. It
might be worth getting a contract attorney to look into the contract
for you.

Additional sources:
http://www.stimmel-law.com/articles/Usury_Law_in_California.html

Search terms:
usury statute california
usury california
usury california forfeit interest

I hope that my answer has been helpful, and I apologize for the
initial misunderstanding of the question! I hope that things work out
for your parents.  Good luck in the situation. If you need any further
clarifications, let me know and I'll be glad to help.

Cheers,
--keystroke-ga