Yesterday (August 13, 2018) the California Supreme Court held in De La Torre et al. v. CashCall that consumer loans exceeding $2,500 made by California licensed lenders may be unconscionable because of high interest rates. Before yesterday’s decision, the prevailing view was that California licensed lenders had complete discretion to set interest rates on loans over $2,500 (per section 22303 of the California Financial Code).
In De La Torre, the Ninth Circuit certified the following question to the California Supreme Court: “Can the interest rate on consumer loans of $2,500 or more render the loans unconscionable under section 22302 of the Financial Code?”
The certified question stemmed from CashCall’s practice of making loans to consumers in the amount of $2,600 with 96% and 135% interest rates. A handful of consumer borrowers filed a class action challenging the loans as unconscionable based on their high interest rates. CashCall argued that because the California legislature set an interest rate cap in Section 22303, but applied it only to consumer loans of less than $2,500, the legislature intended to abrogate the doctrine of unconscionability as it applied to the interest rates on loans exceeding $2,500. The Supreme Court disagreed, holding that although California law allows California licensed lenders to set interest rates on consumer loans above $2,500, this does not mean that a court cannot invalidate the loan as unconscionable.
The California Supreme Court held that a court must evaluate whether the interest rate is unconscionable under the following guidelines: “The court must consider whether there was (1) undue oppression arising from an inequality of bargaining power, including the various factors tending to show relative bargaining power such as the parties’ sophistication, their cognitive limitations, and the availability of alternatives; and (2) surprise owing to, for example, the terms of the bargain [being] hidden in a prolix printed form or pressure to hurry and sign.” Furthermore, a court must also “‘look to the basis and justification for the price’ . . . If, for example, the interest rate is high because the borrowers of the loan are credit-impaired or default-prone, then this is a justification that tends to push away from a finding of substantive unconscionability.”
The De La Torre decision represents a significant development in California law, which will likely impact lending practices for California licensed lenders who charge interest rates in excess of the cap for consumer loans. It remains to be seen whether the Ninth Circuit will invalidate the CashCall loans at issue. If it does, consumer lenders may be forced to reevaluate their lending practices in California and how they structure their relationships with California clients.
Keesal, Young & Logan’s Consumer and Business Lending practice group advises and represents its financial services clients in connection with internal compliance and regulatory issues, as well as class action and all other civil litigation.
– Keesal, Young & Logan Consumer and Business Lending Practice Group
This information has been prepared by Keesal, Young & Logan for informational purposes only and is not legal advice. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship between you and Keesal, Young & Logan. You should not act upon this information without seeking professional counsel.