Usury compliance produces the same ten questions across most private-lender onboarding conversations. The answers below are reference content drawn from California constitutional and statutory law (Const. art. XV §1; Civ. Code §1916.1), New York General Obligations Law §5-501 and Penal Law §190.40, Regulation Z under 12 C.F.R. Part 1026, and the 2024 E.D.N.Y. decision in Barker v. Rokosz. Consult qualified legal counsel before applying any answer to a specific transaction in your file.

  • California sets a constitutional usury ceiling; New York runs civil and criminal caps.
  • The broker exemption in §1916.1 requires arranging in substance, not just naming.
  • Reg Z’s five-factor test decides business-purpose vs. consumer classification.
  • Entity-borrower carve-outs depend on operating substance.
  • Servicer licensing is a parallel layer, separate from the usury question.

1. What is California’s usury cap?

Cal. Const. art. XV §1 sets the ceiling at ten percent annually for consumer loans. For non-consumer loans the ceiling is the higher of ten percent or five percentage points above the San Francisco Federal Reserve discount rate on the 25th day of the month preceding the loan. Civ. Code §1916.12 implements the constitutional ceiling.

2. How does the California broker exemption work?

Civ. Code §1916.1 exempts loans arranged by a California DRE-licensed real estate broker and secured by real property from the constitutional ceiling. The exemption is fact-specific: the broker must in fact have arranged the loan. The California Mortgage Association April 2025 alert flagged broker-of-record without arranging activity as the most common pierce scenario.

2. What are New York’s usury caps?

N.Y. Gen. Oblig. Law §5-501 sets the civil usury cap at sixteen percent annually. N.Y. Penal Law §190.40 sets the criminal usury cap at 25% annually. The civil cap voids the interest provision. The criminal cap voids the entire loan and creates felony exposure for officers who authorize the rate.

3. Does New York exempt corporate-borrower loans?

Loans of $250,000 or more to corporations are exempt from the civil usury cap. Loans of $2.5M or more are exempt from both the civil and criminal caps. The exemption requires the corporation to be a real operating entity — Barker v. Rokosz (E.D.N.Y. July 8, 2024) shows the pierce where a corporation is formed at the lender’s instruction with no independent purpose.

4. What is Regulation Z’s five-factor test?

Reg Z Comment 3(a)-3 to 12 C.F.R. §1026.3(a) lists five factors a lender weighs to classify a transaction as business-purpose: (1) relationship of the borrower’s primary occupation to the property; (2) personal management role; (3) ratio of property-derived income to total income; (4) transaction size; (5) borrower’s stated purpose. No single factor controls.

5. Is a borrower-signed business-purpose affidavit enough?

No. The affidavit covers factor five — the borrower’s stated purpose. A defensible business-purpose file documents the lender’s analysis of factors one through four with case-specific facts. The substance test, not the affidavit, decides classification.

6. What happens if a business-purpose classification fails?

TILA disclosures become required. HOEPA high-cost mortgage protections attach if rate or fee triggers are met. State consumer-protection statutes — N.Y. Banking Law §6-l in Barker, similar statutes in other states — create state-law liability. The Barker decision dismissed the lender’s foreclosure action as a remedy.

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

The answer is jurisdiction-specific. New York Banking Law Part 419, Massachusetts Ch. 93 §24, Illinois 205 ILCS 635, and similar regimes in New Jersey, North Carolina, Washington, Florida, and Texas each maintain their own servicer-licensing or registration regimes. Several states do not exempt business-purpose loans on residential collateral. The importance of mortgage licensing for private lenders walks through the multi-state framework.

8. Does a broker exemption claim survive if the broker mishandles trust funds?

The broker exemption under Civ. Code §1916.1 turns on the broker arranging the loan, not on the broker’s separate compliance with trust-fund rules. But DRE-discipline actions for trust-fund commingling under B&P §10176(e) destabilize every active loan in the broker’s file. Diligent documentation at the servicing layer protects the chain of evidence.

9. What is the difference between civil and criminal usury in New York?

The civil cap at sixteen percent voids the interest provision and limits the lender to principal recovery. The criminal cap at 25% voids the loan entirely — principal and interest — and creates personal felony liability for officers and directors. Crossing the criminal threshold is the operational red line in New York private lending.

10. Is this article legal advice?

No. This is reference content drawn from the cited primary sources. Usury and business-purpose classification are fact-intensive. Consult qualified legal counsel before applying any framework above to a specific deal, especially in cross-state structures or contested litigation contexts.

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