Want to get around California's usury laws? I've got a solution for you.
Say you want to loan X $500,000. But you want to collect an illegal interest rate: say, 50% a year. If you try to do this in a straightforward fashion, not only will your usurious loan mean that you don't get any interest, but you'll probably be liable for treble damages as well.
But X is desperate, and you're out to make a buck. So here's what you do.
Loan X the $500,000. Make the interest rate low (and legal); say, 5% a year. But also make the term incredibly short: say, a week. Have X agree to a stipulated judgment if he doesn't pay the loan when it's due. After a week goes by, make the demand, X won't pay, and then enter the stipulated judgment.
Now, normally, all that would get you is a judgment for $500,000 that accrues postjudgment interest at 10% (noncompounded) a year.
But here's where the solution comes in. Now that you have a judgment, enter into a "forebearance" agreement. Have X agree that in return for you not immediately enforcing the judgment, he'll pay you a specified amount as a "forebearance fee". Say, $20,000 a month. Which -- oh-so-coincidentally -- turns out to be an interest rate of around 50%.
You couldn't have charged 50% up front. That'd be illegal. But if you do what I just described, that's not illegal. According to today's holding from the Court of Appeal. Even though it has the exact same effect.
I've changed the facts of the case around, but what I've described is doctrinally identical to what the Court of Appeal approves in this case. Justice McGuiness adds a caveat at the end of the opinion that says that forebearance fees don't get added to the judgment itself (and are instead a separate contract between the parties), and that it's possible that such a contract could perhaps be unconscionable. But, in truth, those limitations will likely be relatively meaningless. The fact that the fees are a contract will not detain anyone, since that's no different than any other (usurious or non-usurious) loan. And, yeah, you could argue unconscionability, but good luck with that. It doesn't work against pawn shops, it doesn't work against payday loans, and as long as the disclosures are pretty clear, it's not going to work against pretty much anyone.
So there you have it. A relatively easy way to negate Article 15 of the California Constitution.
You're welcome.
