The California’s Supreme Court’s affirmative answer to a question posed by the Ninth Circuit sends back to the appellate court a decade-old federal lawsuit with the potential to drastically alter California’s lending landscape.
Thirty years ago, state lawmakers passed a deregulation bill that removed interest rate caps on loans of at least $2,500, but also gave courts the authority to find the rates unconscionable.
Lawyers for CashCall argued that the Legislature intended to exempt loans of $2,500 or more from any interest rate regulation, otherwise they would not have removed the caps.
The Supreme Court disagreed. When state Sen. Rose Ann Vuich introduced the deregulation bill in 1985 it did not contain that unconscionability protection. But two weeks after receiving a letter from then-Attorney General John Van De Kamp expressing concern about the lack of consumer protections from unreasonably harsh interest rates, Vuich added the protection now contained in Section 22302 of the Financial Code.
“This sequence of events fairly gives rise to the inference the legislation that became section 22302 was enacted to assuage the concern that the removal of interest rate caps would leave consumers without protection against exorbitant interest rates,” Justice Mariano-Florentino Cuellar wrote for the unanimous court. “By passing this legislation, the Legislature ensured that unconscionability would protect against such overreaching by lenders.”
He added, “At core, CashCall fails to persuade that removing an interest rate cap is the equivalent of making the interest rate immune from a finding of unconscionability.”
CashCall, based in the city of Orange, California, was a trailblazer in the realm of high-interest consumer loans to borrowers with low credit scores. One of its signature offerings is a $2,600 unsecured loan, payable over 42-month period with a variable interest rate ranging from 96 to 135 percent.
Eduardo De La Torre brought a federal class action against the lender in 2008. He’d taken out such a loan as a UCLA student in 2006, and could not afford to repay CashCall the $9,000 he owed with a 98 percent interest rate. De La Torre claims the so-called payday loan violated California’s unfair competition law as unconscionable.
But a federal judge ruled in 2014 that to find CashCall’s interest rates unreasonably harsh would “impermissibly require the court to regulate economic policy,” an area strictly within the Legislature’s purview to shape.
De La Torre and the class of borrowers appealed to the Ninth Circuit, which asked the California Supreme Court to weigh in on the issue of interest rate unconscionability.
Cuellar said the Legislature clearly intended for the courts to have a say. “By making an unconscionable loan a violation of the Financing Law and therefore actionable under UCL, the Legislature made clear that courts must grapple with such actions,” he wrote.
In an interview, Graciela Aponte-Diaz, director of California policy with the Center for Responsible Lending hailed the ruling’s strengthening of consumer protections against unscrupulous payday lenders.
“This is great news for consumer protection. Borrowers can now take cases to court and determine if these rates are unconscionable,” she said.
Aponte-Diaz said payday loans and other high-interest rate loans have long preyed on vulnerable borrowers, and the time has come for the Legislature to do something about it.
The California Department of Business Oversight’s 2015 annual report noted that 54 percent of high-cost installment loans of $2,500 to $10,000 had interest rates of 100 percent or higher.
“We now want to push further on the state Legislature to push for an interest rate cap for loans.
It’s definitely better for the state legislature to draw a line because we’re leaving a lot of uncertainty if people have to take cases to court,” Aponte-Diaz said.
In an interview, consumer finance lawyer Allen Denson, whose Washington-based firm Hudson Cook watched the case closely, said Monday’s ruling opened the door to interest rate regulation by the courts.
“It’s definitely a big blow for CashCall,” he said. “They have not necessarily lost the case but the California Supreme Court has said this is a viable theory you can go forward on. What’s interesting for me is that I think this will be first of many lawsuits to test this theory. Even though the state hasn’t imposed an interest rate cap [courts] can still find loans are unconscionable. And where is the line?”
He added, “Enterprising plaintiff lawyers are absolutely going to start testing it. It opens the door for courts to set interest rate caps impliedly.”
In the past two years, state lawmakers have introduced bills that would have reinstated interest rate caps on larger consumer loans.
Assembly Bill 1109 by Assemblyman Ash Kalra, D-San Jose, would have capped interest rates at 24 percent for consumer loans of $2,500 to $10,000. That bill died in the Assembly Banking Committee chaired by Assemblyman Matt Dababneh, D-Encino, who resigned last year amid sexual misconduct allegations.
Another Kalra bill, AB 2500, aimed at capping interest rates at 36 percent on loans between $2,500 and $5,000, was voted down in the Assembly this year.