Can Usury Ever Be Waived?

California courts have defined "usury" as "the exacting, taking or receiving of a greater rate than is allowed by law, for the use or loan of money." Ross v. Wheeler 140 Cal. App. 217, 222 (1934).  The California Constitution sets the maximum rate of interest for the loan or forbearance of money not primarily for personal, family or household purposes, as the higher of:

  • 10% per annum, or
  • 5 % plus the rate of interest prevailing ont he 25th day of the month preceding the earlier of the date of the extension of the contract to make the loan or forbearance or the date of making the loan or forbearance, established by the Federal Reserve Bank of San Francisco on advances to member banks under sections 13 and 13(1) of the Federal Reserve Act.

Cal. Conts. Art. XV, § 1.

Suppose a creditor unwittingly lends money at a usurious rate to an equally clueless borrower who ultimately defaults on the loan.  In order to extend the loan, the parties enter into a forbearance agreement which includes the borrower's waiver of known and unknown claims (including Civil Code § 1542).  Has the borrower given up his claim of usury?  That was the question addressed in Hardwick v. Wilcox, 2017 Cal. App. LEXIS 458 (Cal. App. 1st Dist. May 22, 2017).

In that case, the trial court found that the forbearance did not constitute a waiver of the borrower's usury claim against the creditor because (1) exempting the creditor from the consequences of usury would violate public policy, and (2) the parties did not know or intend that the release would waive a usury claim. The Court of Appeal, in an opinion by Ignazio ("Nace") John Ruvolo, agreed that the trial court's findings on this point were "legally and factually" sound.  In addition, the Court of Appeal found that the borrower "did not waive the protections of the usury law either by executing usurious notes, paying usurious interest, or signing a forbearance agreement that obligated him to continue to make usurious interest payments".  Significantly, the Court also observed that the factual evidence showed that the release was not part of a settlement of a usury claim or of any other dispute.  Rather, the purpose was to extend the due dates of the creditor's loans.  Thus, the case does not answer the question of whether parties may knowingly or unknowingly waive a usury claim in a settlement agreement.