By: T. Robert Finlay, General Counsel for the CMA and Partner at Wright, Finlay & Zak, LLP

If you own or service loans with interest rates over 10% (and don’t live under a rock), you probably recall the industry turmoil created in 2023 by the In re Moon bankruptcy decisions. To address the problems created by In re Moon, the California Mortgage Association authored Senate Bill 1146, which became effective January 1, 2025.

 

While SB 1146 resolved the most immediate issues created by In re Moon, the fix only works if the loan modification, forbearance, or extension is actually “negotiated or arranged” by a licensed DRE broker. Agreements negotiated by loan servicers without the necessary license could potentially still run afoul of the logic behind In re Moon and, in turn, violate California’s usury cap.

 

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 DRE 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 affirmed the lower bankruptcy court ruling 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 limited a lender’s options when trying to work with a borrower to avoid foreclosure on a loan with an interest rate over 10%.

 

Specifically, in the BAP’s view, 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 to a claim of usury for not following the BAP’s opinion.[1]

 

Along came SB 1146 to save the day! Effective January 1, 2025, SB 1146 amended Civil Code Section 1916.1 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.

 

While this amendment resolved the usury dilemma for most lenders, it’s important to remember that the forbearance, modification, or extension must be “negotiated or arranged” by the licensed real estate broker. Forbearances, modifications, or extensions on loans with interest rates in excess of 10% that are negotiated or arranged by someone other than a licensed broker could result in the original broker exemption to the usury cap not being applied to the forbearance, modification, or extension.

 

To avoid that risk, please make sure that the individual that is actually negotiating or arranging the forbearance, modification or extension on a broker exempt loan is a licensed real estate agent.[2]

 

Note – The above analysis only applies when (a) the interest rate following the forbearance, modification or extension exceeds 10% (inclusive of any fees charged as part of the agreement); and (b) the loan was originally exempt from California’s usury cap under a broker exemption. The above analysis does not apply if the loan was exempt from the usury laws due to some other exemption, e.g., loans negotiated or arranged by a CFL licensee, credit union, national bank, etc.

 

Disclaimer: The above information is tailored to California loans and 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.

 

 Robert Finlay, Esq. is general counsel for CMA and a founding partner at Wright, Finlay & Zak, LLP. He can be reached at rfinlay@wrightlegal.net.

 

[1] In an unpublished decision, the Ninth Circuit upheld the BAP’s decision in In re Moon.  While the Ninth Circuit’s opinion was unpublished (and, therefore, uncitable), and BAP opinions are not binding on other courts, the analysis underlying that decision can still be found by those other courts to be persuasive as to the interpretation of the California’s Constitution and Civil Code ₴ 1916.1.

[2] Note – There is a viable legal argument that an extension or forbearance that does not change the interest rate does not render an exempt loan usurious.  That said, the argument needs to be tested at the appellate level before developing a policy based on it.