Can California borrowers paying over 100% annual interest rates bring a claim that the loan terms were unconscionable?
California law places explicit limits on interest rates that may be charged on loans of up to $2500. For loans over $2500, however, the only limit is that, under general consumer protection laws, loan terms may not be “unconscionable.” Cashcall, a California loan company, sought to avoid the numerical caps on interest rates by issuing $2600 personal loans, charging interest rates from 96% to 135%, resulting in borrowers paying back as much as $11,000 on a $2600 loan. Low-income borrowers sued, charging that the loans were unconscionable. The district court granted summary judgment for CashCall, on the ground that determining a limit on conscionable interest rates, when the legislature had not done so, would inappropriately engage in “setting economic policy.”
On appeal to the Ninth Circuit, Public Good joined a brief, authored by the Center for Responsible Lending, arguing that it was improper for the district court to avoid the question. The lack of a specific numerical interest cap for loans above $2500 did not mean that no interest rate could be unconscionable. At some point (100% or 1000% or …?) an interest rate (in context) exceeds the bounds of propriety; at that point a court must strike the term and determine the remedy. What a court may not do is dodge the inquiry entirely. Unless predatory loan terms can be found unconscionable under general consumer protection laws, lenders in noncompetitive markets (or where terms are not clearly conveyed) will be able to offer loans at sky-high interest rates, leaving misled or vulnerable consumers with no redress.
56 F.Supp.3d 1105 (N.D. Cal. Oct. 21, 2014), and 9th Cir. Nos. 14-17571, 15-15042.