An “In Re Moon” Update

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

Note: this only applies to California loans where the interest rate is over 10% and
the usury exemption used at origination involved a licensed real estate broker.

In a case of no good deed going unpunished, the Ninth Circuit has held that a settlement agreement that lowered the existing interest rate and extended the debtor’s time for payment, was nonetheless a transaction that violated the usury laws as the rate was above 10% – even though the original transaction was itself exempt under the usury laws.

By way of background, California loans with interest rates over 10% are considered usurious unless one of the many exemptions apply. One of the most common exemptions is when the loan is negotiated or arranged by a licensed broker. In that event, the interest rate can exceed 10%. In 2023, the Bankruptcy Appellate Panel out of the 9th Circuit (“BAP”) dealt lenders using the “broker exemption” a blow when it held that, in order to maintain the broker exemption following a forbearance, the forbearance itself must be negotiated and arranged by the licensed broker who originated the loan itself AND that loan was in connection with a sale, lease or other transaction (i.e., a purchase money loan). As a result, the BAP’s decision in In Re Moon arguably restricts the use of the broker usury exemption to any forbearances! This leaves lenders with few options – (1) if it was a purchase money loan, use the original broker to negotiate the forbearance; (2) refuse to do a forbearance, i.e., foreclose; (3) lower the interest rate to below 10% as part of the forbearance; or (4) risk exposure for not following the BAP’s opinion.

The lender in the Moon case appealed the matter to the 9th Circuit. Industry groups rallied behind the lender (who was just trying to help the borrower avoid foreclosure). To that end, our office filed an amicus brief on behalf of the CMA and NPLA. Oral argument was held on March 25, 2024. In a very quick turnaround, the 9th Circuit affirmed the BAP decision (in an unpublished decision), agreeing with its holdings that: (1) the settlement agreement was a forbearance for purposes of the usury laws, (2) it was not subject to an exception under 1916.1 (as this was not a credit sale and no broker was involved in the forbearance, (3) it did not matter that the interest rate was lowered since it was still above 10%, and (4) the lender was nonetheless entitled to post-judgment interest on the principal. The Court declined to adopt the policy arguments urged by the lender and mortgage industry to narrow the usury laws application but did not address either the request to certify the question to the CA Supreme Court or any of the amici briefs. The Opinion can be accessed via this link. [Note: Access the document using your ShareFile login and password. If you do not have one, please create one by clicking on the Forgot Password link and follow the prompts.]

While the lender has some options available to itself, this decision is likely final, creating a real dilemma for any broker-exempt loans in default where the interest rate is 10% or more. It will also create a nightmare if interest rates continue to rise across the board.

Note – The 9th Circuit’s decision is unpublished and not binding on California state courts. As a result, it is possible that a State court judge could reach a different conclusion, giving the industry another crack at the issue via a State court appeal. In addition, please note that this opinion does not address whether a forbearance on a loan with an IR below 10% could be deemed usurious when factoring in points, fees or other charges. Those charges could push your effective IR over the 9.99% threshold, even on a forbearance.

Finally, please note that the CMA and its lobbyist, Mike Belote, are working on a legislative solution that would allow lenders to help defaulted borrowers via a forbearance, without the fear of reprisal for allegedly violating the usury statutes. To assist with those efforts, please donate to the CMA’s PAC and, when we send notice, be prepared to reach out to your representatives. Thank you!