By T. Robert Finlay, Esq.
Wright, Finlay & Zak, LLP

Since the Honchariw decision came down last September, the CMA and its members have spent a lot of time trying to determine when and where default interest can be charged. As previously discussed, the Honchariw decision didn’t specifically prohibit and
arguably condoned charging default interest on the missed monthly installment. However, the court never considered whether doing so could violate other laws, namely the prohibition on charging compound interest. Unfortunately, according to CMA’s General Counsel, Robert Finlay, charging default interest on the interest portion of a missed monthly payment could violate other laws related to charging compound interest.

Pursuant to the uncodified Civil Code Section 1916-2: “interest shall not be compounded, nor shall the interest thereon be construed to bear interest unless an agreement to that effect is clearly expressed in writing and signed by the party to be charged therewith.” The first question is whether the agreement allows for compound interest. The second question is, if there is no such provision in the agreement, is the lender exempt from Section 1916-2 under Art. XV, Section 1. In Wishnev v. Nw. Mut. Life Ins. Co., (2019) 8 Cal.5th 199, 219, the California Supreme Court answered a question on this point as follows: “The provision in section 1916–2 prohibiting lenders from assessing compound interest ‘unless an agreement to that effect is clearly expressed in writing and signed by the party to be charged therewith’ does not apply to lenders exempt under article XV.” However, as the California Supreme Court explained, at 218: “This conclusion does not mean exempt lenders may charge compound interest without a contractual or legal basis to do so. It simply means they are not subject to statutory liability and penalties otherwise imposed by the 1918 initiative on nonexempt lenders.” In other words, the gold standard would be if there is an agreement allowing the charging of
compound interest; however, if there is no such agreement and the lender is exempt, the charging of compound interest might be improper but will not be a violation of the usury laws.

Absent a written agreement allowing compound interest, CMA members may want to discuss with their counsel whether to only charge default interest on the principal portion of the missed monthly installment, as opposed to the entire missed installment.
Disclaimer: Nothing contained herein should be considered legal advise or relied on in any way. Please consult with the counsel
of your choosing before taking any action in response to reading this article.

Disclaimer: Nothing contained herein should be considered legal advise or relied on in any way. Please consult with the counsel
of your choosing before taking any action in response to reading this article.