The California Supreme Court ruled Monday that interest rates on consumer loans can be “unconscionably” high and therefore illegal.

By James Rufus Koren
Aug 13, 2018 | 4:00 PM

California’s high court has ruled that interest rates on consumer loans can be so high that they become “unconscionable” and, therefore, illegal — a decision that could call into question the validity of millions of loans and upend the state’s subprime lending market.

In a unanimous opinion released Monday morning, the California Supreme Court said courts “have a responsibility to guard against consumer loan provisions with unduly oppressive terms,” including interest rates, despite state laws that have until now allowed lenders to charge whatever the market will bear.

California lending law sets maximum rates for loans up to $2,499 but no cap on loans of $2,500 and up. However, when lawmakers removed interest-rate caps on those larger loans in the 1980s, they included language that allowed loan terms to be found “unconscionable.”

Attorneys representing a class of CashCall borrowers in 2008 sued the company in federal court over loan rates and other terms that they argued made the loans unconscionable. The plaintiffs borrowed from CashCall at rates of 96% or 135% from 2004 to 2011.

CashCall, based in Orange County, offers consumer loans at interest rates topping 100%. Its attorneys argued that by removing a cap on interest rates, the Legislature intended to allow lenders to set their own rates without interference from state regulators.

The case, De La Torre vs. CashCall, is before the U.S. 9th Circuit Court of Appeals, which asked the state high court to weigh in on California lending law — specifically whether a high interest rate alone could be unconscionable and thereby void a loan.

“The answer is yes,” Associate Justice Mariano-Florentino Cuéllar wrote in an opinion signed by all seven justices.

The Supreme Court did not, however, find that CashCall’s rates are unconscionably high. The opinion leaves it to state regulators and other courts to determine if or when rates cross that threshold.

Nor did the ruling provide clear guidance on the issue, with Cuéllar stating that a court should only declare interest rates unconscionable if, given all the other terms and facts of a loan, the rate is “unreasonably and unexpectedly harsh” as to “shock the conscience.”

The high court acknowledged the difficult position its opinion will put other judges in.

“We recognize how daunting it can be to pinpoint the precise threshold separating a merely burdensome interest rate from an unconscionable one,” Cuéllar wrote.

Many other states, including New York, have interest-rate limits on such high-dollar loans, while some are largely unregulated. Monday’s opinion only applies to loans made in California by state-licensed lenders.

The De La Torre case will now go back to the 9th Circuit and potentially back to federal district court in San Francisco for a trial. Jim Sturdevant, an attorney who represents the borrowers in the case, said he expects a trial to be held next year.

He called Monday’s opinion “a dramatic, full-throated victory” for consumers.

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