California Real Estate Broker ExaminationFinancingEasy
A lender is reviewing a borrower's application and notes that the interest rate charged is above the legally permitted maximum. This practice is known as:
- AAmortization
- BDiscounting
- CPredatory lending
- DUsury
Show answer & explanationAnswer & explanation
Correct answer: D. Usury
Usury is the act of lending money at an interest rate that is excessively high or above the maximum legal rate. State laws, including California's, set limits on the interest rates that can be charged.
Why the other options are wrong
- A. Amortization is the process of gradually paying off a debt over time through regular principal and interest payments.
- B. Discounting refers to selling a promissory note for less than its face value.
- C. Predatory lending encompasses a broader range of unfair or deceptive lending practices, which may include usury but is not limited to it.
Usury
The illegal act of charging an interest rate that is higher than the maximum legal limit established by state law. Usury laws are designed to protect borrowers from excessive interest charges.
- Involves interest rates above legal maximums
- Protects borrowers from exploitation
- Specific limits vary by state (e.g., California's usury laws)
Memory trick: Usury is 'U-S-U-R-Y' = 'Unfairly Super-Unreasonable Rates, Yes!'