Private lender usury exposure depends on where your note is secured, how the borrower is classified, and whether a recognized exemption applies. In California, the broker exemption removes the constitutional ceiling only when the broker genuinely arranged the loan. In New York, crossing the criminal cap voids the entire note and creates felony liability for every officer who authorized the rate.

The answers below are reference content drawn from California constitutional and statutory law (Cal. 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.

• California sets a constitutional usury ceiling; New York maintains both civil and criminal caps.
• The broker exemption in §1916.1 requires arranging in substance — not simply appearing as broker of record.
• Reg Z’s five-factor test determines business-purpose vs. consumer classification for every private note.
• Corporate-borrower carve-outs in New York depend on the entity’s independent operating substance, not its formation documents.
• Servicer licensing is a parallel compliance layer, separate from the usury analysis.

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 at the statutory level. California’s ceiling applies to the note’s stated rate, not to points, fees, or other charges treated separately under state law — a distinction that requires careful structuring at origination.

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 have genuinely arranged the loan. A broker named on the file without substantive arranging activity — sourcing the borrower, negotiating terms, placing the loan — is the most common pierce scenario flagged in California Mortgage Association compliance guidance. Courts examine what the broker actually did, not what the loan documents say the broker did.

3. What are New York’s usury caps, and how do civil and criminal exposure differ?

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 cap at 25 percent annually. The two thresholds carry different consequences. The civil cap voids the interest provision only — the lender is limited to recovering principal. The criminal cap voids the entire loan, both principal and interest, and creates personal felony liability for the officers and directors who authorized the rate. Crossing the criminal threshold is the operational red line in New York private lending. Most lenders treat it as a hard ceiling regardless of any exemption analysis, because a misstep there eliminates not just interest income but the entire note.

4. Does New York exempt corporate-borrower loans?

New York exempts loans above specified statutory thresholds made to corporations from the civil usury cap, and loans above a higher statutory threshold from both the civil and criminal caps. The exemption requires the borrowing corporation to be a real operating entity. Barker v. Rokosz (E.D.N.Y. July 8, 2024) illustrates the pierce: the court found that a corporation formed at the lender’s instruction with no independent operating purpose could not claim the exemption. Lenders relying on a corporate-borrower carve-out need contemporaneous evidence that the entity has genuine independent substance — operating history, separate management, and a purpose not created solely to facilitate the loan.

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

Reg Z Comment 3(a)-3 to 12 C.F.R. §1026.3(a) identifies five factors a lender weighs to classify a transaction as business-purpose: (1) the relationship of the borrower’s primary occupation to the property; (2) the borrower’s personal management role; (3) the ratio of property-derived income to total income; (4) transaction size; and (5) the borrower’s stated purpose. No single factor controls the classification. The test is a totality-of-circumstances analysis. A defensible classification file documents the lender’s written analysis of all five factors, supported by loan-file evidence, before the transaction closes.

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

No. The affidavit addresses factor five only — the borrower’s stated purpose. Lenders who rely on the affidavit alone have documented one factor while leaving four unaddressed. Regulators and plaintiffs’ counsel treat an affidavit-only file as evidence that the lender knew the issue existed but did not investigate it. A defensible business-purpose file pairs the affidavit with the lender’s own written analysis of factors one through four, grounded in case-specific documents: the borrower’s tax returns, the property’s rent roll, the borrower’s professional background. The substance of the file, not the existence of the affidavit, decides classification in a dispute.

7. What happens when a business-purpose classification fails?

TILA disclosures become required. If the loan meets HOEPA’s rate or points-and-fees triggers, high-cost mortgage protections attach and additional restrictions apply to loan terms. State consumer-protection statutes add a state-law layer — N.Y. Banking Law §6-l was the operative statute in Barker, and analogous statutes exist in most states. In Barker, the court dismissed the lender’s foreclosure action as a remedy, leaving the lender with a voided note, no enforceable security interest, and no path to recover the collateral. Rescission rights may also run to the borrower. The downstream consequences of a failed classification are not limited to the interest provision.

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

The requirement is jurisdiction-specific and cannot be generalized. New York Banking Law Part 419, Massachusetts Ch. 93 §24, Illinois 205 ILCS 635, and comparable frameworks in New Jersey, North Carolina, Washington, Florida, and Texas each maintain independent servicer-licensing or registration regimes with their own exemption structures. Several states do not extend business-purpose exemptions to loans secured by residential collateral, meaning a note a lender treats as commercial at origination may still trigger servicer-licensing requirements in the state where the collateral sits. Five compliance traps new private lenders must avoid covers the multi-state licensing layer in detail.

9. Does the broker exemption hold if the broker mishandles trust funds?

The Civ. Code §1916.1 exemption turns on whether the broker arranged the loan — not on the broker’s separate compliance with trust-fund rules. The two questions run on different tracks. That said, DRE discipline actions for trust-fund commingling under B&P §10176(e) expose every active loan in the broker’s file to heightened scrutiny, and a broker who loses licensure post-origination creates questions about the continuing validity of the exemption claim. A complete, independently maintained servicing record at the servicer level keeps the chain of evidence intact when a broker comes under investigation and protects the lender’s position in the loan file.

10. Is this article legal advice?

No. This is reference content drawn from the primary sources cited above. Usury and business-purpose classification are fact-intensive questions that turn on the specific documents in your loan file, the state where your collateral is located, and the structure of your lending operation. Consult qualified legal counsel before applying any framework here to a specific deal, particularly in cross-state structures, multi-lender arrangements, or contested litigation contexts.

Expert Take

Usury compliance is not a single question — it is a stack of questions that run in parallel. Whether a rate is permissible depends on state law. Whether state law’s ceiling applies depends on Reg Z classification. Whether an exemption survives depends on the substance of the broker’s role and the borrower entity’s legitimacy. Private lenders who resolve only one layer while leaving the others unaddressed carry exposure on every note in their portfolio. The framework above identifies the checkpoints that need answers before a loan closes — it does not replace the counsel who works through them with you on a specific file.

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