California borrowers paying over 100% annual interest rates can bring a claim that the loan terms are unconscionable.
The Issue: 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” (i.e., “unreasonably and unexpectedly harsh,” “unduly oppressive,” or “so one-sided as to shock the conscience”). CashCall, a California loan company, sought to avoid the numerical caps on interest rates by issuing $2600 personal loans, charging effective interest rates from 96% to 135%, resulting in some 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 the court would be inappropriately “setting economic policy” if it were to determine a limit on conscionable interest rates when the legislature had not done so.
Why It Matters: Hundreds of thousands of California’s most economically vulnerable residents incur crippling debt after taking out short-term high-interest loans under duress or deception, often resulting in serious harms, including delayed medical care and bankruptcy – with a host of further attendant adverse consequences. 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 and vulnerable consumers with no hope of redress.
Public Good’s Contribution: On appeal to the Ninth Circuit, Public Good co-authored a brief with the two other consumer advocacy organizations, 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 – a court may not dodge the inquiry entirely. Otherwise, victims of predatory lending would be left without recourse. After the Ninth Circuit certified to the California Supreme Court the question of whether the rate of interest on a loan can be so high as to render the loan contract unconscionable under California law, the consumer organizations filed a brief there arguing for an affirmative answer to the question.
Amici represented by Public Good: The brief in the Ninth Circuit was filed on behalf of – and co-authored by – the Center for Responsible Lending, the National Association of Consumer Advocates, and Public Good. The same amici filed in the California Supreme Court, joined by Public Citizen.
Outcome: After certification from the Ninth Circuit, the California Court, in a victory for low-income borrowers, affirmed that under California law an excessively high rate of interest can render a loan contract unconscionable, reasoning that any term in a contract may be unconscionable. The Court did not decide whether the interest rates challenged in this case were in fact unconscionable. Accordingly, the Ninth Circuit vacated the district court’s decision and remanded.
56 F. Supp. 3d 1073 (N.D. Cal. 2014), and on reconsideration, 56 F. Supp. 3d 1105 (N.D. Cal. 2014), and question certified, 854 F.3d 1082 (9th Cir. 2017), and certified question answered, 422 P.3d 1004 (Cal. 2018), and vacated and remanded, 904 F.3d 866 (9th Cir. 2018).