Banking and Finance Law Daily Loans not subject to rate limits may be deemed unconscionable
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Tuesday, August 14, 2018

Loans not subject to rate limits may be deemed unconscionable

By Andrew A. Turner, J.D.

Although California sets interest rate caps only on consumer loans less than $2,500, a court has the authority to declare an interest rate on a loan of more than $2,500 unconscionable. The Supreme Court of California said that borrowers could bring an unfair competition claim that alleged an unlawful lending practice due to an unconscionably high interest rate (De La Torre v. CashCall, Inc., Dec. 22, 2016, Cuellar, M.).

Making consumer loans to high risk borrowers, one of CashCall, Inc.’s signature products was an unsecured $2,600 loan, payable over a 42-month period, and carrying an annual percentage rate of either 96 percent or, later in the class period, 135 percent. Because loans of more than $2,500 were not subject to any rate cap, CashCall contended that such loans could not be unconscionable due to their rate.

Whether an interest rate is unconscionable, according to the court, is a different inquiry than whether the rate exceeds a numerical cap because unconscionability is a flexible standard that consider the process and the larger context surrounding the contract, as well as the complained-of-term. Just because consumer loans of $2,500 or more are not subject to an interest cap does not mean that they cannot be found unconscionable, in the court’s view.

Legislative intent. The statutory structure indicated to the court that the legislature intended to leave unconscionability as a relevant consideration in cases involving interest rates in consumer loans. This gives the court an opportunity to consider the bargaining process and prevailing market conditions, in contrast to a rigid rate cap.

Remedies. In response to concerns about the court’s ability to fashion a remedy that could usurp the legislature by imposing a ceiling on interest rates, the court asserted that "remedies routinely have economic consequences, and we do not think courts are devoid of power to issue properly-fashioned remedies to mitigate unconscionability." Limited application of remedies to protect consumers would not undermine other purposes of the California Financing Law such as fostering competition and ensuring an adequate supply of credit.

The case is No. 14-17571.

Attorneys: James C. Sturdevant (The Strudevant Law Firm) and Steven M. Tindall (Gibbs Law Group) for Eduardo De La Torre. Williams Cuker Berezofsky (Berezofsky Law Group) for Public Citizen, Inc., National Association of Consumer Advocates and Center for Responsible Lending. Brad W. Seiling (Manatt, Phelps & Phillips, LLP) for CashCall, Inc. James R. McGuire (Morrison & Foerster LLP) for California Financial Service Providers Association, Financial Service Centers of America and Community Financial Services Association of America.

Companies: Public Citizen, Inc.; National Association of Consumer Advocates; Center for Responsible Lending; CashCall, Inc.; California Financial Service Providers Association; Financial Service Centers of America; Community Financial Services Association of America

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