Calif. Supreme Court Rules That High Interest Rates Can Make Loans Illegal

The California Supreme Court has ruled that interest rates charged on consumer loans can be so high that it makes the loan illegal in a decision that published reports say could upend the payday lending and subprime lending markets in the Golden State.

The Supreme Court yesterday ruled unanimously in favor of the plaintiffs in a case where he obtained a $2,600 loan from the defendant, at an interest rate of 96%. The Supreme Court had been asked for its opinion by the Court of Appeals for the Ninth Circuit, which the case will now return to. The plaintiff had ended up owing more than $9,000 on his $2,600 loan.

A copy of the ruling in the case of De La Torre vs. CashCall can be accessed by clicking here. The case, which started more than a decade ago. The defendant had originally won a summary judgment in the case, which was appealed to the Ninth Circuit, which asked the California Supreme Court for its opinion. Starting in 2011, the defendant added a mandatory arbitration clause to its lending agreements.

California law regulates interest rates on consumer loans, but only up to $2,500. In bringing the suit, the plaintiffs alleged that the defendant violated California’s Unfair Competition Law, which defines unfair competition to include “any unlawful, unfair or fraudulent business act or practice.” The plaintiffs alleged that the loan was unlawful because it violated a section of state law that applies the unconscionability doctrine to consumer loans.

“Can the interest rate on consumer loans of $2,500 or more render the loans unconscionable under section 22302 of the Financial Code?” wrote Associate Justice Mariano-Florentino Cuéllar. “The answer is yes.”

What is interesting about the ruling is that it does not establish a threshold for what constitutes an unconscionable interest rate nor does it say whether the interest rate charged by the defendant exceeded that threshold. The ruling only goes as far as to say that it is possible for an interest to be so high that it becomes illegal.

“We recognize how daunting it can be to pinpoint the precise threshold separating a merely burdensome interest rate from an unconscionable one,” Justice Cuellar wrote. “But that is no reason to ignore the clear statutory embrace here of a familiar principle — that courts have a responsibility to guard against consumer loan provisions with unduly oppressive terms.”

A number of lending groups have said that companies may stop making loans in California if the Supreme Court ruled that interest rates could be deemed unconscionable. The potential is for judges to invalidate loans that were made years ago because the interest rates are now deemed to be too high.

The lawyer representing the plaintiffs is said to be representing plaintiffs in three lawsuits against debt buyers in similar cases, according to a published report.