California Supreme Court Holds Loans with Unconscionably High Interest Rates Can be Unlawful
The California Supreme Court recently held that unconscionably high interest rates on consumer loans can be unlawful. The holding was issued in response to the Ninth Circuit’s certification to the state court of the following question: whether the interest rate on consumer loans of $2,500 or more can render the loans unconscionable under section 22302 of the California Financial Code.
The question arose from an appeal involving a lender of consumer loans to high-risk borrowers, including one of the lender’s signature products, which was an unsecured $2,600 loan, payable over a 42-month period, and carrying an annual percentage rate of either 96 or 135 percent. The borrowers claim that the loans violated the “unlawful” prong of California’s Unfair Competition Law (UCL) on the basis that the loans violated section 22302 of the Financial Law, which applies the unconscionability doctrine to consumer loans. The lender contends that the loans cannot be unconscionable on this basis because section 22302 “has nothing to do with interest rates.”
The California Supreme Court determined that while section 22303 of the Financial Code sets interest rate caps only on consumer loans less than $2,500, it does not imply that a court may never declare unconscionable an interest rate on loans of $2,500 or more, and that, when read together with section 22302, clearly shows that the state legislature’s purpose in enacting these provisions was to free larger-denominated debts from the rigid regulation of usury rates, without rendering irrelevant to those transactions the flexible standard of unconscionability long rooted in both California statutes and common law. In this regard, the court stated that unconscionability is a flexible standard in which courts must look not only at the complained-of term, but also the larger context of the process by which the parties arrived at the agreement.
Addressing concerns that ad hoc judicial determinations would undermine the Financial Code’s purpose by driving lenders out of the market, thereby depriving consumers of credit options and hampering competition among lenders, the California Supreme Court proffered that courts are not devoid of power to issue properly fashioned remedies to mitigate unconscionability. The court also noted that the limited remedies available under the UCL will likely mitigate a possible flood of unmeritorious lawsuits, including pure attorney-driven lawsuits (since no attorney fees may be recovered) as well as blackmail settlements (since no money recovery beyond restitution is possible).
Finally, the California Supreme Court clarified that, because the Ninth Circuit did not ask it to decide whether the lender’s loans were unconscionable, its opinion does not resolve that question and, instead, holds only that California law permits such a finding, so long as the unconscionability requirements are satisfied.
