Tuesday, August 14, 2018
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Interest Rates Can Be Unconscionable Even If Exempt from Usury Statute—S.C.
By a MetNews Staff Writer
The state Supreme Court said yesterday that the Legislature, in setting maximum interest rates on consumer loans below $2,500, did not intend to authorize unlimited rates on loans of higher amounts, with those loans being subject to the statute barring unconscionable contracts.
The Ninth U.S. Circuit Court of Appeals certified a question to the state’s high court in April of last year after the plaintiffs in a class action brought in U.S. District Court appealed the award of summary judgment by U.S. Magistrate Judge Maria-Elena James of the Northern District of California in favor of CashCall, Inc., a consumer loan company. The defendant made high-risk loans and charged interest rates of as high as 135 percent.
It argued that because Financial Code §22303—which prescribes maximum rates on consumer loans ranging from one percent to two-and-a-half percent—declares that it “does not apply to any loan of a bona fide principal amount of two thousand five hundred dollars ($2,500) or more,” there is no limit on what may be charged on loans of $2,500 or higher.
Ninth Circuit’s Question
The named plaintiffs in the class action (with the class comprised of those charged 90 percent interest or higher) argued the applicability of the neighboring statute, §22302. The question posed by the Ninth Circuit was:
“Can the interest rate on consumer loans of $2500 or more governed by California Finance Code § 22303, render the loans unconscionable under California Finance Code § 22302?”
Writing for a unanimous court, Justice Mariano-Florentino Cuéllar responded:
“[W]e answer the Ninth Circuit’s question in the affirmative: an interest rate on consumer loans of $2,500 or more may be deemed unconscionable under Financial Code section 22302.”
Civil Code Section
Sec. §22302 provides:
“(a) Section 1670.5 of the Civil Code applies to the provisions of a loan contract that is subject to this division.
“(b) A loan found to be unconscionable pursuant to Section 1670.5 of the Civil Code shall be deemed to be in violation of this division….”
Sec. 1670.5 says:
“(a) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.
“(b) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to aid the court in making the determination.”
Incorporation of §1670.5
Cuéllar wrote:
“By incorporating Civil Code section 1670.5, section 22302 applies the unconscionability doctrine to contract terms in a consumer loan agreement.”
The jurist commented:
“We recognize how daunting it can be to pinpoint the precise threshold separating a merely burdensome interest rate from an unconscionable one. 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.”
CashCall’s Contention
CashCall argued that the plaintiffs were entitled to no relief because §22302 provides for no private cause of action. Cuéllar pointed out that the action was brought under the Unfair Competition Law (“UCL”), Business & Professions Code §17200 et seq., and said:
“[I]t does not matter that plaintiffs cannot recover the remedies made available under section 22302. Plaintiffs are not praying for remedies under section 22302. They are seeking UCL remedies—restitution and injunctive relief—which are recoverable ‘cumulative’ of any other remedies….
“Nor does it help CashCall to argue that Civil Code section 1670.5 merely codifies the defense of unconscionability without providing for an affirmative cause of action. Whatever merit underlies the claim, it proves irrelevant where a different statute—here, section 22302—expressly provides that an unconscionable loan breaks the law and the UCL supplies a cause of action to police such unlawful conduct.”
Flood of Lawsuits
CashCall warned of a flood of lawsuits over interest rates if the state Supreme Court were to proclaim such rates to be subject to invalidation based on unconscionability.
“Private individuals like plaintiffs may win restitution or injunctive relief, but they cannot obtain damages or attorney fees,” Cuéllar pointed out. “The relative paucity of remedies under the UCL should serve to limit pure attorney-driven lawsuits (since no attorney fees may be recovered) as well as blackmail settlements (since no money recovery beyond restitution is possible).”
The case is De la Torre v. CashCall, Inc., 2018 S.O.S. 3923.
Copyright 2018, Metropolitan News Company