Moon v. Milestone Usury Controversy
April 24, 2024
By: Dennis H. Doss | Doss Law, LLP
Where are we today?
On April 16, 2024, the Ninth Circuit Court of Appeals, in an unpublished decision, affirmed the Bankruptcy Appellate Panel’s earlier decision finding that Milestone Financial violated the usury law when it extended and lowered the interest rate on a broker-arranged mortgage loan it owned. Milestone was unlicensed at the time. The lowered rate was 11.3%, above California’s limit of 10% on non-exempt loans. It found that California usury law only exempts “loans or forbearances” arranged by licensed real estate brokers. No broker was involved in the Milestone extension, so the Court found the extension was usurious.
The decision elevates form over substance. Presumably, Milestone could have sat on its hands and let the loan accrue interest above 10% or even accepted payments post maturity and then issued a rebate when the loan paid off. But because it memorialized the extension and rate reduction, the Court increased Milestone’s simple act of compassion to a “forbearance” subject to a new usury analysis. Under Federal consumer credit law, Section 1026.20(a) of Regulation Z, the act of lowering the rate on a consumer loan does not result in a “refinancing” subject to a new compliance analysis.
The new decision did not touch the earlier decision which suggests that even if a broker had been involved, it would not have solved the usury problem because the statutory exemption for broker-arranged forbearances only applies to broker-arranged purchase loans.
So where does the decision leave us until a legislative solution is passed? To be on the safe side, unless you are an exempt lender like a California Finance Lender, you should rewrite the loan entirely with the help of a licensed real estate broker. If the loan has matured but the borrower needs a couple of months to pay you off, consider just sitting on your hands (but you must return payments), especially if the borrower has paid well and there is plenty of equity supporting your loan. If your loan has a default interest provision, you also enjoy a higher yield while waiting for your payoff.
Prudent legal advice comes from experience. We have over 50 years of it.
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