A year ago, the U.S. Court of Appeals for the Ninth Circuit certified the case, De La Torre v. CashCall, S241434, to the California Supreme Court. The inquiry and question? “Can the interest rate on consumer loans of $2500 or more governed by California Finance Code § 22303, render the loans unconscionable under California Finance Code § 22302?” The Federal court stated that deciding the issue itself would involve it in “impermissible economic policy-making.” In August 2018, the California Supreme Court held that otherwise legal loans may be held unconscionable under the CFLL and California courts indeed have the power to make such a determination.
Eduardo De La Torre obtained a loan with an interest rate over 90% from CashCall, a licensed consumer lender exempt from usury pursuant to California statutory law. De La Torre’s suit was premised on the unfairness of the loan’s interest rate rather than it being usurious.
The defendant, CashCall, was a provider of consumer loans to high-risk borrowers with certain loans carrying an annual percentage rate (APR) of both ninety-six percent and, at a later point in the class period, 135 percent. It was alleged that CashCall violated California’s Unfair Competition Law (UCL), Cal. Bus. & Prof. Code § 17200 because, in violating § 22302, its’ lending practice was thereby unlawful.
Examining California statutory law and the will of the California legislature regarding loans of $2,500 or more, the answer is a bit unclear, to say the least. The California Finance Lenders Law (CFLL) places no limit on the interest rates that a lender may charge, although, in § 22302, it expressly provides that such loans may nonetheless be legally unconscionable and violate the CFLL.
Basically, the question of the federal court of appeals pondered whether California law allows a judge to determine the unconscionability of an interest rate for a loan that is a legal loan, even though the California legislature has technically chosen to refrain from regulating interest rates on the types of loans in question.
The decision makes uncertain the unconscionability of every high interest rate consumer loan in California. The problem for lenders is predetermining a fair economically sensible interest rate which is not unconscionable and meets applicable standards while overcoming any challenge in California courts. Clear and plain disclosure of interest rates will help withstand any challenge based on unconscionability. A further question is whether this principle will be applied to commercial loans in the near future.
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