California Update: Governor Newsom signs Fix to In re Moon (SB 1146)

Authored by Robert Finlay, Esq. of Wright, Finlay & Zak, LLP

Governor Newsom signs Fix to In re Moon (SB 1146)

Great news! Governor Newsom just signed SB 1146, fixing the issue created by the In re Moon decisions. Please see our earlier email below for additional details from Robert Finlay of Wright, Finlay, and Zak LLP, co-chair of the NPLA’s Legislative Committee. The new law will become effective January 1, 2025. Please be careful when modifying, extending, or forbearing any loan between now and the end of the year!

Details on the Fix to In re Moon

Legislative updates are usually scary, but not this one!  Senate Bill 1146, sponsored by the California Mortgage Association and co-written by Robert Finlay, the NPLA’s co-legislative chair, passed both houses and is headed to Governor Newsom’s desk.  Once signed, the new law will become effective January 1, 2025, fixing the usury risk created by the In re Moon decisions. While a fix is on the way, please be careful when modifying, extending, or forbearing any loan between now and the end of the year!

By way of background, California loans with interest rates over 10% are considered usurious unless one of the many exemptions apply. In the private lending space, the most common exemption is when the loan is negotiated or arranged by a licensed broker. In that event, the interest rate can exceed 10%. In 2023, the Bankruptcy Appellate Panel out of the 9th Circuit (“BAP”) dealt lenders using the “broker exemption” a blow when it held that, in order to maintain the broker exemption following a forbearance, the forbearance itself must be negotiated and arranged by the licensed broker who originated the loan itself AND that loan was in connection with a sale, lease or other transaction (e.g., a purchase money loan). As a result, the BAP’s decision in In Re Moon severely limits a lender’s options when trying to work with a borrower to avoid foreclosure on a loan with an interest rate over 10%. Specifically, the lender can – (1) if it was a purchase money loan, use the original broker to negotiate the forbearance; (2) refuse to do a forbearance, i.e., foreclose; (3) lower the interest rate to below 10% as part of the forbearance; or (4) risk exposure for not following the BAP’s opinion.

The lender in the Moon case appealed the matter to the 9th Circuit. Industry groups rallied behind the lender (who was just trying to help the borrower avoid foreclosure). To that end, the NPLA teamed with the CMA to hire Wright, Finlay & Zak to file an amicus brief on the industry’s behalf. Unfortunately, the 9th Circuit affirmed the BAP decision (in an unpublished decision), agreeing with its holdings that: (1) the settlement agreement was a forbearance for purposes of the usury laws, (2) it was not subject to an exception under 1916.1 (as this was not a credit sale and no broker was involved in the forbearance, (3) it did not matter that the interest rate was lowered since it was still above 10%, and (4) the lender was nonetheless entitled to post-judgment interest on the principal. 

With the judicial battle lost, our friends at the CMA proposed SB 1146, which amends applicable law to provide that any licensed broker can negotiate or arrange a “forbearance, modification or extension” of a loan with an interest rate over 10% and keep the broker exemption to the usury cap intact.  

Thank you to the CMA, the NPLA’s Legislative Committee, and all the NPLA members who helped push this important industry fix through both houses and onto Governor Newsom’s desk! 

If you have any questions or need help navigating the various State, City, or County regulations, please feel free to contact the NPLA at [email protected]