Default Rates:
Can You Charge Them?

Hello Valued Lenders,

Over the last few years, the California courts have made some important rulings that could have significant implications in private lending practices. This newsletter will address rulings made relating to the charging of default interest.

Staying informed about these legal updates is crucial for any private lender or private lending business, particularly if operating in California or when dealing with California borrowers.    In September 2022, the California Court of Appeal issued a ruling in the case Honchariw v. FJM Private Mortgage Fund, LLC (2022) that affects how default interest is applied to private loans. Here are the key takeaways from this Honchariw Ruling:

• Ruling: The California 1st District Court of Appeals decided that lenders cannot charge default interest against the principal balance of any loan, except when the borrower defaults on the maturity of the loan.
• Implications:
  • Prohibition: Default interest charges are not allowed for defaults other than non-payment or defaulting on maturity.
  • Legal Standing: The California Supreme Court denied to review this ruling, making it a binding precedent.
  • Compliance: Loan documents and enforcement of default interest are to align with this ruling.  A) Default interest must be proportionate to actual costs or losses incurred due to the borrower’s default, and B) default interest cannot be excessive.
• Key Takeaways:
  • Proportionality: Default interest rates must be justified by the actual costs or losses resulting from the borrower’s default.  Default interest that is excessively high will not hold up in court.
  • Documentation: Default rates must be explicitly stated in the loan documents to be enforceable.
  • Initiation of Default Rates: Default interest can only be charged against the principal balance of any loan when the borrower defaults on the maturity of the loan.

By following these guidelines, legal risks can be minimized in California Trust Deed investing.  We will continue to keep you informed through our Newsletters about any changes in legislation and court rulings that affect private lending practices.

We look forward to continuing to support you in your investment endeavors.  And as always, feel free to reach out if you have any questions or have a friend or family member who would like to invest!

Warm regards,
Ken Walker
Broker/Owner
Pacific Direct Mortgage & Real Estate, Inc

DRE #01858042 / NMLS #1221130
Phone: 707-708-0797 
Office:  1400 N Dutton Ave #22 Santa Rosa, CA 95401