Real Estate Loan Is Subject To Usury Laws Because Escrow Agent Did Not “Arrange” Loan


In Gibbo v. Berger, 2004 Daily Journal D.A.R. 12,945, Cal.App. 4 Dist., Oct. 22, 2004, the California Court of Appeal considered the issue of whether an escrow agent “arranged” a loan so as to exempt it from usury laws, where the agent merely prepared documents according to terms provided by the parties, ordered title insurance, and disbursed funds.


Harold Berger loaned $15,000 to Ayleen Gibbo and her husband. The loan was secured by a deed of trust on the Gibbos’ property. For a $100 fee, Mecca Escrow, which was owned by a real estate agent, prepared the deed of trust, prepared the loan documents using preprinted forms, obtained a title insurance policy, and disbursed funds. According to the terms of the note, the Gibbos were to pay interest only for a period of one year, and then pay the balance. However, the Gibbos paid $187.50 in interest for ten years. When Mr. Berger died, his estate sued for payment of the outstanding $15,000 principal. Ms. Gibbo opposed the suit, claiming the 15% interest rate violated Article XV, section 1 of the California Constitution because it was usurious. The estate claimed the loan was exempt from the usury law because it was made or arranged by a licensed real estate broker. The trial court agreed with the estate and Ms. Gibbo appealed.

Appellate Court Decision

A loan is not subject to the usury laws if it was “arranged by a person licensed as a real estate broker when the broker . . . acts for compensation or in expectation of compensation for soliciting, negotiating, or arranging the loan for another.” The Court of Appeal concluded that the real estate broker that owned the escrow agency did not “arrange” the loan between Ms. Gibbo and Mr. Berger so as to exempt the loan from the usury laws. Arranging a loan refers to “some conduct by a real estate broker, acting as a third party intermediary rather than as a party to the loan, that causes a loan to be obtained or procured.” Such conduct would include setting the interest and points, setting terms of the forbearance agreement, reviewing the documents, conducting title searches, or drafting the terms of the loan. Here, however, the agent’s involvement was “limited to preparing loan documents according to instructions and on the terms provided by the parties, ordering title insurance, and dispersing funds, all in accordance with the parties’ instructions.” The agent did not draft the terms of the agreement, search title to the property, or perform any other act that could be viewed as arranging a loan.

Thus, the Court concluded that the rate was usurious and Mr. Berger’s estate was only entitled to payment of the principal. As the Gibbos had paid $19,125 to Mr. Berger, they did not owe the estate any money. The Court sent the case back to the trial court to determine if Ms. Gibbo is entitled to damages for unjust enrichment (because she paid more than the principal amount) or treble damages for violating the usury laws.

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