The Broker Arranged Loan Exemption From Usury Comes Under Attack

A Broker Who Prepared The Loan Documents, Ordered Title Insurance and Dispersed the Funds, Did Not “Arrange” the Loan for Purposes of Exemption from Usury

A violation of the maximum interest rate that can be charged on a loan exposes the lender to some very harsh penalties, including the return of all interest paid and the possibility of treble damages on the amount of interest paid for a one-year period. Many lenders take comfort in an exception from the limitations on interest rates for loans made or arranged by a licensed real estate broker. Such comfort may be misplaced, according to the very recent California Court of Appeal, Fourth District, case of Gibbo v. Berger (2004 DJDAR 12945 (October 22, 2004)). In that case a broker who prepared the loan documents, ordered title insurance, and dispersed the loan funds did not “arrange” the loan, according to the Court.

Article XV of the California Constitution, Section 1, as amended, sets the maximum allowable interest rate on a loan or forbearance, above which the rate is legally usurious. Under Cal. Const., Art. XV, §1, this maximum rate “shall not exceed the greater of (a) 10 percent per annum or (b) 5 percent per annum plus the prevailing Federal Reserve Bank of San Francisco’s rate on the 25th day of the month preceding the earlier of (i) the date of execution of the contract to make the loan, or (ii) the date of the loan.”

Certain exceptions from the maximum interest rate are found at Civ. C. § 1916.1, Inapplicability of interest rate restrictions to secured loans made by licensed real estate broker. One of those exceptions is for loans made or arranged by a licensed real estate broker. Civ. C. § 1916.1 reads: “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. For purposes of this section, a loan or forbearance is arranged by a person licensed as a real estate broker when the broker (1) acts for compensation or in expectation of compensation for soliciting, negotiating, or arranging the loan for another, . . .”.

In the Gibbo case, Harold Berger loaned $15,000 to Dick and Ayleen Gibbo in 1992. The loan was evidenced by a note and secured by a deed of trust on the Gibbos’s real property. The note and deed of trust had been prepared by Myrna Bravender, owner of Mecca Escrow. Bravender, a licensed real estate broker, was one of the two escrow officers who handled the loan transaction.

The escrow instructions the escrow officers prepared the loan documents according to the escrow instructions, using preprinted forms. They obtained title insurance and disbursed the funds, all for a fee of $100.00. The note called for monthly payments of interest at the rate of 15% per annum, with all outstanding principal and interest due in one year. Despite the one-year term the Gibbos made monthly interest payments for ten years without objection by lender Berger.

When Berger died in 2002, his daugher Janice made demand on the note. By this time Dick Gibbo was also deceased. When Ayleen Gibbo was unable to pay, Janice Berger commenced a non-judicial foreclosure. Gibbo sued to enjoin the foreclosure and quiet title to her property, asserting that the 15 percent interest rate on the note was usurious, and seeking return of all interest paid as well as statutory treble damages and other remedies. Berger cross-complained for declaratory relief, asking for a determination that the loan had been made or arranged by a licensed real estate broker and was therefore exempt from the usury provisions in the Constitution and the Civil Code. Alternatively, Berger asserted that if the interest rate was found to be usurious, the “safe harbor provision” in the note applied and she was entitled to interest “at the maximum rate permitted by law.”

The trial court found that the loan had been arranged by a licensed real estate broker and was therefore exempt from the usury limitations on interest. The win for Berger was to be only temporary.

Gibbo appealed. The issue before the Court of Appeal was whether Bravender “arranged” the loan. The Court said that the question before it was, “what conduct constitutes arranging a loan for another within the meaning of Civil Code section 1916.1.” To answer its own question the Court first turned to another contemporary usury case of Del Mar v. Caspe (1990) 222 Cal.App.3d 1316. However the Court of Appeal in that case used a Webster’s dictionary definition for the word “arrange.” The definition was basically, “to put in order” like one might arrange flowers. Thus this Court said that such a definition would result in absurd results, saying, “a licensed real estate broker who photocopies and collates the pages of a loan document and then charges a fee for that service will be held to have “arranged” a loan which [sic] is exempt from the constitutional usury provision.” The Court thus declined to follow the Del Mar Court’s rationale.

Instead the Court found that Bravender did not engage in any conduct that resulted in a loan being obtained or procured. She did not introduce Berger and Gibbo to one another. She was not involved in setting or negotiating any of the terms of the loan. She did not structure the loan. Although she prepared the loan documents, she did not draft any portion of them, but merely inserted in the blanks the terms agreed to by the parties. In this regard Bravender was little more than a scrivener.

In the Court’s view she did not engage in any act that could be viewed as arranging a loan, weighing that Bravendar was the not the cause for the loan. Rather, Bravender functioned as an escrow officer and performed the duties specified in the escrow instructions of the parties, such as ordering the title insurance. Accordingly, the Court of Appeal reversed the judgment of the trial court.

Citing another case the Court said, “When a loan is usurious the creditor is entitled to repayment of the principal sum only. He is entitled to no interest whatsoever.”

Berger argued that because Gibbo did not repay the principal at the one-year maturity date on the note, Gibbo was thereafter in default and Berger was accordingly entitled to interest at the legal rate pursuant to the savings clause in the note. The Court quickly dispensed with this argument, saying that Berger accepted the monthly payments without complaint and thereby waived any default. Berger did not make demand on the note until 2002. Thus the savings clause did not apply.

As a result, Gibbo’s monthly interest payments had, in the aggregate over the ten years, exceeded the $15,000 principal amount of the loan. Thus Gibbo was entitled to all the money that she paid in excess of that amount. And the case was remanded to the trial court for a determination of whether the Gibbos were entitled to the discretionary penalty of three times the amount of interest paid for a period of one year.

This case illustrates that not all loans involving the participation of a licensed real estate broker and secured by real estate will be exempt from the usury limitations on interest. It will depend on the level of involvement by the broker. In the Del Mar v. Caspe cited by the Court, the broker conducted title searches, calculated the outstanding principal owed, set the interest rate on additional loans to the borrower, “drafted” (as opposed to prepared) loan documents, and discussed those documents with the lender and borrower. The Gibbo Court said that “even under the narrowest interpretation of that term (“arranged”), Caspe’s involvement amounted to arranging a loan within the meaning of [Civil Code § 1916.1].

This article written and © Peter N. Brewer, Esq.

Brewer Offord & Pedersen LLP ( serves the legal needs of homeowners, real estate and mortgage brokers, agents, brokerages, title companies, developers, investors, other real estate professionals and their clients. Mr. Brewer and his firm also represent clients in debt collection, breach of contract matters, and other litigation and transactional work. The firm’s client range from homeowners, brokers and lenders based in Santa Clara County, San Mateo County, San Francisco County, as well as throughout other counties in California.