California's high court has ruled that interest rates on consumer loans can be so high that they become "unconscionable" and, therefore, illegal -- a decision that could upend the state's subprime loan market.
In a unanimous opinion released Monday morning, California Supreme Court justices said courts "have a responsibility to guard against consumer loan provisions with unduly oppressive terms," including interest rates, despite state laws that give lenders wide latitude in setting rates.
California lending law sets maximum rates for loans of up to $2,499, but no cap on loans of $2,500 and up. But when lawmakers removed interest-rate caps on those larger loans in the 1980s, they included language that allowed loan terms to be found "unconscionable."
Attorneys for Orange County lender CashCall, which, like many lenders, offers consumer loans at interest rates topping 100 percent, argued that by removing a cap on interest rates, the Legislature intended to give lenders freedom to set their own rates without interference from state regulators.
But attorneys representing a class of CashCall borrowers who sued the company in federal court over loan rates and other terms argued that the interest rates can become so high that they are unconscionable. The plaintiffs borrowed from CashCall at rates of 96 percent or 135 percent.
The case, De La Torre vs. CashCall, is before the 9th U.S. Circuit Court of Appeals, which asked that the state Supreme Court weigh in on California lending law -- specifically whether a high interest rate alone could be unconscionable and thereby void a loan.
"The answer is yes," the state court said Monday, adding that the price of a loan, like any other term, can be unconscionable.
The opinion does not put an end to the De La Torre case, nor does the opinion say that CashCall's rates are unconscionably high. Rather, it leaves to state regulators and other courts to determine if or when rates cross that threshold.
The decision could inject uncertainty into California's subprime consumer lending market, in which a growing number of loans come with interest rates topping 100 percent. The opinion could spur more consumer lawsuits challenging lenders' rates and perhaps lead to a pullback in high-cost consumer lending.
Business on 08/14/2018