By T. Robert Finlay, Esq.

 Rarely are legislative updates full of good news, but this one is!  Senate Bill 1146, sponsored by the California Mortgage Association (“CMA”) and co-written by the CMA Legislative Committee and the legal team at Wright, Finlay & Zak, passed both houses and was signed into law by Governor Gavin Newsom.  Effective January 1, 2025, this law provides for a number of ‘wins’ for the private lending industry.

The In re Moon Decisions

 SB 1146 fixes the usury risk created by the In re Moon decisions.  While this fix is on the way, please be careful when modifying, extending, or forbearing any loan between now and the end of 2024!

 By way of background, California loans with interest rates over 10% are considered usurious unless one of the many exemptions apply. In the private lending space, the most common exemption 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 (e.g., a purchase money loan). As a result, the BAP’s decision in In Re Moon severely limits a lender’s options when trying to work with a borrower to avoid foreclosure on a loan with an interest rate over 10%. Specifically, the lender can – (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).  Our office filed an amicus brief on behalf of the CMA and the National Private Lenders Association. Unfortunately, the 9th Circuit affirmed the BAP decision (in an unpublished decision), agreeing with its holdings that: (1) the settlement agreement was a forbearance for purposes of the usury laws, (2) it was not subject to an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. 

 With the judicial battle lost, the CMA proposed SB 1146, which amends the applicable law to provide that any licensed broker can negotiate or arrange a “forbearance, modification or extension” of a loan with an interest rate over 10% and keep the broker exemption to the usury cap intact.  Thank you to the CMA, its lobbyist, Mike Belote, its Legislative Committee Chair, Liz Knight, and everyone else who helped get SB 1146 through both houses!

 HOBR and Small Investors

 During the height of the Financial Crisis, California passed its landmark legislation intended to help homeowners facing foreclosure – the Home Owner Bill of Rights (“HOBR”).  In short, HOBR required loan servicers to follow certain procedures when putting defaulted borrowers on notice of foreclosure prevention alternatives and prevented servicers from “dual tracking,” i.e., simultaneously proceeding with foreclosure while the homeowner is being reviewed for a loan modification.  The law was limited to owner-occupied consumer loans in first position.[i]

 HOBR intended to put loan servicers into two buckets for compliance purposes – the “Big Guys” who annually handle 175 or more annual qualifying foreclosures and certain “Little Guys” who do not meet the 175 threshold.  While servicers in both buckets are prohibited from dual tracking, the more detailed and onerous HOBR provisions only applied to the Big Guys, including, but not limited to: 

  • Civil Code 2923.7, requiring a Single Point of Contact; and
  • Civil Code § 2923.6, mandating certain notices and procedures when the borrower submits a complete loan modification.

 The Little Guys “exception” to the more detailed requirements was limited in Civil Code § 2924.15 to:

 (A)    A depository institution chartered under state or federal line  law, a person licensed pursuant to Division 9 (commencing with 3 Section 22000) or Division 20 (commencing with Section 50000) of the Financial Code, or a person licensed pursuant to Part 1 (commencing with Section 10000) of Division 4 of the Business 6 and Professions Code, that, during its immediately preceding annual reporting period, as established with its primary regulator, foreclosed on 175 or fewer residential real properties, containing no more than four dwelling units, that are located in California.

 But what if you’re a retired couple who occasionally invests in Trust Deeds, but are not a “depository institution” or someone “licensed” by the Financial or Business and Professions Codes?  The answer – small investors must comply with the more detailed and onerous HOBR provisions intended by the Legislature to only apply to the Big Guys doing over 175 annual foreclosures!  Hard to believe, but an investor who makes or buys one loan a year, must comply with the same HOBR provisions as the largest loan servicers in the country.

 Since HOBR’s enactment in 2013, the private lending industry has looked for a solution to this obvious unintended oversight by the California Legislature.  Unfortunately, for years, there was no appetite in Sacramento to re-open the heated discussions over HOBR.  Fortunately, enough time had finally passed, which allowed the California Mortgage Association (“CMA”) to sponsor Senate Bill 1146, which, among other things, puts a small investor who “makes and services seven or fewer loans for the purchase of residential real property” a year in the same compliance bucket as loan servicers who conduct fewer than 175 annual foreclosures.

 These amendments will go into effect January 1, 2025.   Please remember that, regardless of what bucket you fit into, everyone must comply with HOBR.  The “buckets” just determine which provisions of HOBR must be complied with. 

 Disclaimer:  The above information is intended for information purposes alone and is not intended as legal advice. Please consult with counsel before taking any steps in reliance on any of the information contained herein.

[i] In response to COVID’s impact on landlords, California’s Legislature amended HOBR in 2020, extending its application to certain tenant occupied properties. These extensions have since expired.


T. Robert Finlay is General Counsel for the CMA and a Partner at Wright Finlay & Zak. He can be reached at rfinlay@wrightlegal.net