Usury law is the rate ceiling — set by state constitution, statute, or both — above which an interest charge becomes unenforceable, criminally chargeable, or in some states triggers principal forfeiture. For private lenders, the practical question is not “what is the cap” but “which exemption controls this loan.” California fixes the answer in its Constitution and Civil Code, then carves out the licensed-broker exemption that built the modern private-money market. New York fixes the answer in its Penal Law, then carves out exemptions for entity borrowers and business-purpose loans — but the carve-outs are narrower than most lenders assume. Federal Regulation Z and a 2024 Eastern District of New York decision in Barker v. Rokosz show how courts pierce a thin business-purpose record and reattach consumer protections — including TILA and HOEPA liability — to a deal a lender thought was exempt.

  • California caps non-exempt loans at the higher of ten percent annually or five percentage points above the San Francisco Federal Reserve discount rate (Cal. Const. art. XV §1; Cal. Civ. Code §1916.12).
  • California Civil Code §1916.1 exempts loans arranged by a licensed real-estate broker — the foundation of California private-money lending.
  • New York imposes a sixteen percent civil usury cap and a 25% criminal usury cap (N.Y. Gen. Oblig. Law §5-501; N.Y. Penal Law §190.40).
  • Regulation Z’s five-factor test (Comment 3(a)-3) decides business-purpose versus consumer classification — a borrower-signed affidavit is not an absolute shield.
  • Barker v. Rokosz, E.D.N.Y. July 8, 2024, voided a private foreclosure after the court found the lender’s required-entity structure still extended credit to a natural person.
  • Servicer licensing is a parallel layer: New York Banking Law Part 418/419, Massachusetts Ch. 93 §24, Illinois 205 ILCS 635, and similar regimes require a license to service even business-purpose loans on residential collateral in several states.
  • This article is reference content, not legal advice — consult qualified legal counsel before relying on any exemption in a specific transaction.

Why does usury compliance decide private lending economics?

Usury enforcement is the rare regulatory category where the penalty is loan-level rather than program-level. A violation does not produce a fine that gets absorbed into operating cost. It voids interest, voids the loan, or in the strictest states forfeits principal. That economic asymmetry is why every private lending business model is, at its core, a usury-exemption strategy: identify the exemption that fits the deal, document it in the file, and design the servicing record to prove the exemption survived if challenged years later.

The reference framework starts at the federal level. The Truth in Lending Act (15 U.S.C. §§1601–1667f, Regulation Z at 12 C.F.R. Part 1026) defines the consumer-credit perimeter that triggers federal disclosures. Loans extended primarily for “business, commercial, or agricultural purposes” sit outside that perimeter under 12 C.F.R. §1026.3(a). The Home Ownership and Equity Protection Act (HOEPA) layers high-cost mortgage protections on top of TILA for loans secured by a consumer’s principal dwelling. The SAFE Act (12 C.F.R. Part 1008) governs originator licensing under the Nationwide Mortgage Licensing System (NMLS). State law layers on top of all three.

The interaction is what catches new lenders. A business-purpose classification that survives Reg Z does not automatically defeat a state usury claim — and a state usury exemption does not automatically defeat a federal consumer-protection claim if the substance of the deal was consumer credit. The compliance question is always: which exemptions apply, in which jurisdictions, and is the file built to prove each one independently? Operational discipline at the servicing layer is where that proof either holds or unravels. A lender’s licensing posture, the broker exemption claim, and the business-purpose record all sit inside the same file — the servicer’s job is to keep them readable and defensible for the life of the loan. See Explaining Business Purpose and Consumer Loans for a deeper walkthrough of the classification mechanics.

How does the California usury framework work?

California is the only state that puts its usury ceiling in the Constitution. Article XV, Section 1 sets the ceiling at ten percent annually for any loan or forbearance of money used primarily for personal, family, or household purposes. For all other loans — business, commercial, investment — the ceiling is the higher of ten percent or five percentage points above the discount rate of the Federal Reserve Bank of San Francisco on the 25th day of the month preceding the earlier of (a) the date of the contract or (b) the date of execution.

California Civil Code §1916.12 implements the constitutional cap. Civil Code §1916.1 then creates the broker exemption that powers the modern California private-money market: “the restrictions upon rates of interest contained in Section 1 of Article XV of the California Constitution shall not apply to any loan or forbearance … made or arranged by any person licensed as a real estate broker by the State of California and secured, directly or collaterally, in whole or in part by liens on real property.” The exemption is statutory, narrow, and procedurally strict. The broker must be DRE-licensed, must be in fact “the broker who arranges the loan,” and the loan must be secured by real property.

The California Department of Real Estate enforces broker conduct on these loans through the Business and Professions Code (§10145, §10176, §10232, §10238) and the Commissioner’s Regulations (Cal. Code Regs. tit. 10, §§2830–2835). The DRE’s published “Ten Most Common Violations Found in DRE Audits” repeatedly flag trust-fund commingling, missing three-way reconciliation, and incomplete columnar records. A broker who arranges loans for ten or more investors, or where payments exceed $125,000 in any 3 business days window, or who originates aggregate loans of $250,000 or more on behalf of multiple investors, faces additional reporting and trust-fund-oversight duties under §10232 (Threshold Brokers) and §10238 (Multi-Lender Transactions). NSC’s documentation guide walks through the file structure that satisfies these audit standards.

The California Mortgage Association’s April 2025 alert on the broker exemption underscores a recurring enforcement theme: brokers who arrange loans without the file evidencing actual “arranging” activity — comparison of lenders, negotiation of terms, file management — are at risk of having the exemption challenged. A loan that names a broker on the closing statement but where the broker did not in fact arrange the loan is the most common usury-pierce scenario in California. The licensing posture private lenders need tracks the broker-of-record discipline that the exemption requires.

Seven California Usury Mistakes That Void a Private Loan

How do New York’s civil and criminal usury caps work?

New York runs two parallel ceilings. The civil usury cap is sixteen percent annually under N.Y. General Obligations Law §5-501 and N.Y. Banking Law §14-a; the criminal usury cap is 25% annually under N.Y. Penal Law §190.40. The civil cap voids the interest provision and limits the lender to principal recovery. The criminal cap, when crossed, voids the loan in its entirety — principal and interest — and creates personal liability for officers and directors who knowingly authorized the rate.

New York carves out exemptions by entity status and loan size. Loans of $250,000 or more to corporations are exempt from the civil cap. Loans of $2.5M or more are exempt from both the civil and criminal caps. Business-purpose loans to corporate borrowers, secured by real property, sit within the entity-borrower exemption — but the exemption depends on the corporation being a real operating entity, not a thin shell created at the lender’s instruction to escape consumer protections. New York’s Department of Financial Services enforces servicer conduct on these loans through Banking Law Part 418 (mortgage loan servicer business conduct) and Part 419 (servicer registration and supervision).

The criminal usury risk is the line that defines New York private lending. A lender who structures a corporate-borrower deal at the criminal-usury threshold is one disputed factual finding away from total loan voidance. New York courts in the consumer-credit pierce line have shown willingness to look behind corporate form when the lender required the entity’s creation as a condition of credit — the doctrine applied in Barker v. Rokosz and consistent with the 1st Circuit’s *Franklin Savings Bank v. Bordick* posture on substance-over-form.

California vs. New York Usury: A Side-by-Side for Private Lenders

How does the business-purpose exemption satisfy Reg Z’s five-factor test?

Regulation Z draws the federal consumer-credit perimeter. Comment 3(a)-3 to 12 C.F.R. §1026.3(a) sets out the five-factor analysis a lender uses to classify a transaction as business-purpose versus consumer. The factors are: (1) the relationship of the borrower’s primary occupation to the property securing the loan; (2) the degree to which the borrower will personally manage the acquisition or use of the property; (3) the ratio of income from the property to total income of the borrower; (4) the size of the transaction; and (5) the borrower’s statement of the purpose of the loan.

No single factor controls. The five factors are weighed together. A borrower-signed business-purpose affidavit — factor five — is the easiest piece of evidence to collect but the weakest piece of evidence on its own. Courts and examiners look at the substance of factors one through four to test whether the affidavit reflects reality. A loan to a borrower whose primary occupation is unrelated to real estate, who has no track record of rental-property ownership, where the borrower will live in or directly use the property, and where the borrower’s salaried income dwarfs any property-derived income — that loan is consumer credit regardless of what the affidavit says.

A defensible business-purpose file contains five document categories: (1) the borrower-signed business-purpose affidavit; (2) entity organizational documents if the borrower is a non-natural entity (articles, EIN, operating agreement); (3) evidence of non-owner-occupancy for rental-property loans (insurance declarations, lease agreements, utility bills); (4) the lender’s completed Reg Z five-factor worksheet with case-specific analysis; (5) the borrower’s written statement of intended use of proceeds. The servicing-record discipline that protects this classification at the boarding stage and through the life of the loan is the difference between a defensible file and a piercing exposure. Lenders evaluating the broker-of-record question on top of this should review the trade-offs in our broker-originated vs. direct lending reference.

How to Build a Defensible Business-Purpose File

Which states require a servicer license for private notes?

Usury exemption is one layer. Servicer licensing is a parallel layer that does not turn on whether the loan is consumer or business-purpose — it turns on whether the state defines “mortgage loan” expansively enough to cover business-purpose loans on residential collateral. Several states do. A private lender who clears the usury question can still face an unlicensed-servicer claim, civil penalties, and state-AG enforcement under unfair-or-deceptive-acts statutes.

New York Department of Financial Services Banking Law Part 419 requires mortgage loan servicer registration for any person engaged in the business of servicing residential mortgage loans in New York — and the regulatory definition does not exempt business-purpose loans on residential property. Massachusetts General Laws Chapter 93, Section 24 and the Division of Banks’ related guidance require third-party loan servicer licensing for residential mortgage loans, with limited exemptions. Illinois 205 ILCS 635 (the Residential Mortgage License Act) and the Department of Financial and Professional Regulation’s interpretations sweep broadly. New Jersey, North Carolina, Washington, Florida, and Texas each maintain their own servicer-licensing or registration regimes with state-specific thresholds.

The compliance question for a private lender lending across state lines is therefore not “am I usury-exempt” — it is “is my servicer (or am I, if I self-service) licensed in every state where I hold a residential mortgage loan?” A small private lender who originates in California under the broker exemption, takes a note secured by New York real property, and self-services from California can be unlicensed under New York Part 419 — a separate violation from any usury question. NSC carries the multi-state servicer licensing footprint that handles this layer for the lenders we work with. The five compliance traps we see most often all sit in this licensing-layer blind spot.

Barker v. Rokosz: What the Court’s Reg Z Pierce Means for Lenders

When does the broker exemption fail in court?

The single most-cited recent case for private lenders relying on the entity-borrower carve-out is Carla Barker v. Rokosz, No. 22-CV-2412 (E.D.N.Y. July 8, 2024). The lender required the borrower to form a corporation as a condition of obtaining the loan. The corporation took title to the property; the loan was documented as business-purpose; the file included a corporate-borrower affidavit. The court found that the substance of the transaction extended credit to the natural person — the borrower — and held the lender in violation of TILA, HOEPA, and New York Banking Law §6-l. The foreclosure action was dismissed. The case is now a primary citation for plaintiff-side attorneys testing the entity-borrower carve-out.

The pierce doctrine in Barker rests on three findings the court treated as dispositive. First, the lender’s requirement that the borrower form the entity — rather than a borrower-initiated decision to use an entity for legitimate business reasons — shifted the substance toward consumer credit. Second, the corporation had no independent operating purpose. Third, the use of proceeds was consistent with a consumer transaction. The Reg Z five-factor analysis would have pointed to consumer-credit classification regardless of the entity-borrower form.

Other recent litigation reinforces the pierce posture. The First Circuit’s *Franklin Savings Bank v. Bordick* (with a CFPB and Maine AG joint amicus brief in 2024) argued that contract-language labels such as “commercial” do not control — the substance test under Reg Z applies. People’s Bank of Arlington Heights v. Atlas (Ill. App. 1st Dist. 2015), by contrast, applied the five-factor test correctly and held a loan secured by a residence but used to fund a tax-certificate business was business-purpose; the lender prevailed. The case-law line is clear: a thin file fails; a defensible file holds. Litigation over usury exemptions is fact-intensive and document-driven — consult qualified legal counsel before relying on an exemption in a contested case. The unlicensed-seller-financing trap is a close cousin to the entity-borrower pierce — both turn on substance-over-form.

Expert Take

“Every private lender we onboard starts with the same misread of usury: they treat the cap as the rule and the exemption as the workaround. The rule is the exemption. Your file builds, proves, and defends the exemption — and your servicer has to keep that file legible for years. A broker-of-record name on the closing statement is not a broker exemption. A corporate borrower with no operating substance is not an entity-borrower carve-out. The pierce cases all rhyme: thin file, contested fact, voided loan.” — Thomas Standen, President, Note Servicing Center

Expert Take — Servicer File Discipline

“The lender who wins the usury defense is not the one who memorized the cap — it is the one whose servicer file proves, document by document, that every exemption element was satisfied at closing and stayed satisfied across the life of the loan. Statute of limitations on a civil usury claim in New York runs from each payment; that means the servicer’s payment ledger is evidence on day one and evidence on day three thousand. Treat the file like the trial exhibit it will eventually be.” — Thomas Standen, President, Note Servicing Center

Frequently Asked Questions

Does the California broker exemption apply to all loans arranged by a licensed broker?

Civil Code §1916.1 exempts loans arranged by a California DRE-licensed real estate broker and secured directly or collaterally by real property. The exemption is fact-specific: the broker must in fact have arranged the loan — compared lenders, negotiated terms, managed the file — not just appeared as broker-of-record. A loan that names a broker without evidence of arranging activity sits outside the exemption. Consult qualified legal counsel on edge cases involving partial arranging activity or out-of-state collateral.

Is a corporate-borrower deal automatically exempt from New York usury?

New York General Obligations Law §5-501 exempts loans of $250,000 or more to corporations from the civil usury cap; loans of $2.5M or more are exempt from both the civil and criminal caps. The exemption depends on the corporation being a real operating entity. Barker v. Rokosz (E.D.N.Y. 2024) shows that an entity created at the lender’s instruction, without independent business substance, will not defeat a consumer-credit pierce. A lender who requires the borrower to form the corporation is at the highest risk.

Does Regulation Z apply to business-purpose loans?

Regulation Z under 12 C.F.R. §1026.3(a) exempts credit extended primarily for business, commercial, or agricultural purposes from TILA disclosures. The exemption requires the lender to apply the five-factor test in Comment 3(a)-3 and document the analysis in the file. A borrower-signed business-purpose affidavit alone is insufficient; the substance of factors one through four — occupation relationship, personal management, income ratio, transaction size — must support the classification.

What is the criminal usury cap in New York?

N.Y. Penal Law §190.40 sets the criminal usury cap at 25% per annum. A lender who knowingly charges interest above this cap is liable for criminal usury in the second degree, a class E felony. The civil consequence is voidance of the loan — principal and interest — and personal liability for officers and directors who authorized the rate.

Do I need a servicer license in every state where I hold a note?

The answer is jurisdiction-by-jurisdiction. New York Banking Law Part 419, Massachusetts Chapter 93 §24, Illinois 205 ILCS 635, and the regimes in New Jersey, North Carolina, Washington, Florida, and Texas each maintain their own thresholds and exemptions for mortgage loan servicers — including, in several states, business-purpose loans on residential collateral. A private lender holding notes across multiple states should evaluate each state’s servicer-licensing layer independently of the usury question. The licensing requirements for private lenders reference walks through the framework.

What is the most common reason private lenders lose a usury defense?

The file. The exemption holds only if the file proves the exemption. The recurring pierce scenarios — broker named without arranging activity, entity formed at lender’s instruction, business-purpose affidavit unsupported by Reg Z analysis — all reduce to documentation gaps. A defensible file at boarding, kept legible by the servicer through the life of the loan, is the difference between an exemption that survives challenge and one that does not.

Private Lender Usury Compliance: Ten Questions Answered

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