SAN FRANCISCO – The California Supreme Court recently ruled in favor of the plaintiffs regarding a the question of whether interest rates may be ruled unconscionable on loans of $2,500 or more.
In its 34-page ruling filed Aug. 13, the court said “an interest rate on consumer loans of $2,500 or more may be deemed unconscionable” under the California Financial Code. Whether or not something is unconscionable is relative to the “contract terms relating to the price of goods or services exchanged.” In this case, the court said that the interest rate is the price of the loan.
Plaintiffs Eduardo De La Torre and Lori Saysourivong originally filed their lawsuit in U.S. District Court for the Northern District of California alleging that CashCall, a financial lender that loaned money to people considered “high-risk borrowers,” had business practices that violated the California Unfair Competition Law. Specifically, the way CashCall loaned money to high-risk borrowers violated the unconscionability doctrine in that its interest rates on a $2,600 loan ranged from 96 percent to 135 percent.
After making its way through the court system and becoming certified as a class-action lawsuit, the 9th U.S. Circuit Court of Appeals sent the question of whether interest rates on loans of $2,500 or more can be considered unconscionable under state law to the California Supreme Court.
The high court noted that for unconscionability to exist there needs to be “oppression or surprise” as well as “overly harsh or one-sided results that epitomize unconscionability.”
The court noted that though state law sets maximum interest rates only on loans less than $2,500, "whether an interest rate is unconscionable is fundamentally a different inquiry than whether the rate exceeds a numerical cap."
In its ruling, the court said that “unconscionability is a flexible doctrine,” and that it is meant to prevent agreements or contracts from being “overly harsh” or “so one-sided as to shock the conscience.” Based on this standard, it found that interest rates on loans of $2,500 or more can meet this standard and can be found to be unconscionable.