CA Supreme Court: Interest rates on consumer loans in excess of $2,500 can be challenged as unconscionable under California law

By Vikram Subramanian

In De La Torre et al. v. Cashcall, Inc. the California Supreme Court recently held that, although California’s Financial Code only imposes interest rate caps on consumer loans for less than $2,500, consumers who borrow more than $2,500 still may challenge as unconscionable the interest rate on those loans.    

The lender in the De La Torre case was a California lender that made consumer loans to high-risk borrowers “with low credit scores” who were living “under financial stress.” One of the lender’s signature products is an unsecured $2,600 loan, payable over a 42-month period, and carrying an interest rate of as much as 135 percent.  Borrowers who took out those loans brought a putative class action in federal court alleging that the loans violated, among other statutes, California’s Unfair Competition Law (UCL).

The California Financial Code imposes caps on the interest rates that lenders may charge on consumer loans for less than $2,500.  The lender in in the De La Torre argued that, because the California Legislature chose not to impose interest rates caps on loans in excess of $2,500, there was no limit on the interest rate it could charge on loans for more than $2,500, such as the $2,600 loans it made to the putative class.  Therefore, the lender moved for summary judgment on the Plaintiffs’ claim that making loans at “unconscionable interest rates” gave rise to a cause of action under the UCL.  The district court granted the motion and entered judgment in favor of the lender on the plaintiffs’ UCL claim.  On appeal, the Ninth Circuit certified the following question to the California Supreme Court: “[C]an the interest rate on consumer loans of $2,500 or more render the loans unconscionable under section 22302 of the Financial Code?”

The California Supreme Court answered the question in the affirmative: “The answer is yes. An interest rate on a loan is the price of that loan, and ‘it is clear that the price term, like any other term in a contract, may be unconscionable.’” The Court explained: “We recognize how daunting it can be to pinpoint the precise threshold separating a merely burdensome interest rate from an unconscionable one. But that is no reason to ignore the clear statutory embrace here of a familiar principle—that courts have a responsibility to guard against consumer loan provisions with unduly oppressive terms. . . . As with any other price term in an agreement governed by California law, an interest rate may be deemed unconscionable.”

Although plaintiffs were not barred as matter of law from challenging their loans as unconscionable, the Court explained that, to prove their claim, they will have to meet an exacting standard.  In particular, plaintiffs will have to prove that the interest rates on their loans were both substantively and procedurally unconscionable.  Substantive unconscionability will require a showing, for instance, that the terms of the loans were overly harsh, unduly oppressive and so one-sided as to shock the conscience.  Procedural unconscionability will require a showing, for example, of inequality of bargaining power or surprise owing to concealment of the terms of the loan in a dense printed form or pressure on the borrower to sign quickly.

In light of De La Torre, lenders in California who make consumers loans in excess of $2,500 would be well advised to review and, if necessary, adjust their operations to minimize potential exposure to claims that interest rates are unconscionable.

 

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