August 13, 2018

California Supreme Court Rules Interest Rates on Consumer Loans Can be Unenforceable Even if Not in Violation of Usury Limits

On August 13, 2018, the California Supreme Court ruled that a consumer loan not otherwise subject to the state usury cap can have an interest rate so high that the loan agreement is "unconscionable" and, therefore, unenforceable.

Eduardo De La Torre sued CashCall on behalf of himself and a class of consumers, arguing that CashCall's loan agreements were unconscionable in violation of the California Finance Code and the California Unfair Competition Law based on their allegedly excessive interest rates. CashCall only made loans greater than $2,500 in California, which are not subject to interest rate caps under California law. CashCall argued that because the legislature affirmatively chose to remove interest rate caps for loans greater than $2,500 - but chose to retain them for smaller dollar consumer loans - these larger loans could not be unconscionable as a matter of law.

The California Supreme Court had the opportunity to reach this issue because the U.S. Court of Appeals for the Ninth Circuit certified a question of whether California law permits a cause of action for unconscionability where the legislature chose to remove interest rate caps. The California Supreme Court held that an interest rate could be found unconscionable for loans of $2,500 or more, reasoning that the interest rate on a consumer loan is a critical term of a loan contract. In certain contexts, upon which the court did not elaborate, courts can study the contract and determine whether on its face the contract is so "one-sided," "overly harsh," or "unduly oppressive" that it should be unenforceable as a matter of public policy.

The California Supreme Court did not issue a ruling on the merits of whether the CashCall loan agreements were in fact unconscionable. The Ninth Circuit will proceed with the case De La Torre vs. CashCall on the merits, taking into consideration this ruling from the California Supreme Court.