On August 13, 2018, the California Supreme Court answered a question certified to it by the Ninth Circuit, holding that a loan with a high interest rate can be unconscionable, even if the legislature specifically declined to impose an interest rate cap on loans of that amount. See De La Torre v. Cashcall, Inc. (No. S241434 (Cal. Aug. 13, 2018)) The Ninth Circuit certified the question to the California Supreme Court in De La Torre v. Cashcall, Inc. (No. 14-17571 (9th Cir. Dec. 30, 2014)), in considering an appeal from a Northern District of California ruling dismissing De La Torre’s case, based on a finding that a loan that is not subject to an interest rate cap cannot be unconscionable under California law.
At issue in De La Torre is whether the interest rate on a $2,600 loan can be unconscionable under the California Unfair Competition Law (UCL) (Cal. Bus. & Prof. Code § 17200), given that the California Finance Code (CFC) § 22303 does not cap the interest rate on loans over $2,500. The Northern District of California held that unconscionability cannot apply, because to so find would require the court to substitute its judgment for that of the California legislature—which chose not to impose any cap on interest rates for loans over $2,500. On appeal, De La Torre argued that unconscionability should apply to consumer loans because CFC Section 22302 specifically provides for unconscionability as a defense to a consumer loan. Therefore, De La Torre argued, he should be able to state a claim under the UCL, which permits suits for “any unlawful, unfair or fraudulent business act or practice”—including the practice of originating loans with unconscionably high interest rates.
The loan at issue was one of Defendant CashCall’s standard product offerings: a $2,600 loan with interest rates ranging between 96% and 135%. De La Torre’s argument was limited to unconscionability—he did not allege that the loan was unfair under the UCL for any other reason (e.g. deceptive advertising, failure to adequately disclose loan terms, etc.). De La Torre appealed the Northern District of California’s grant of summary judgment to CashCall, and the Ninth Circuit certified the unconscionability question to the California Supreme Court.
CashCall argued that, because CFC Section 22303 did not set an interest rate cap on loans over $2,500, the legislature did not intend to place any interest rate limits on those loans. The California Supreme Court rejected that argument, finding that CFC Section 22303 simply did not apply to the loan at issue because, by its plain terms, it only applies to loans in the amount of $2,500 and under. By contrast, the legislature incorporated unconscionability into CFC Section 22302, showing that it intended to allow the defense of unconscionability to apply to consumer loans. Accordingly, the court determined that there was no principle—under either CFC Section 22302 or, more generally, at common law—that would prevent a court from determining that a loan could be unconscionable as a result of a high interest rate. The court found that interest rates are nothing more than the “price” of a loan and, just like any other price, a loan can be rendered unconscionable if it has “unreasonably and unexpectedly harsh terms” that “shock the conscience.” And, if the loan is found to be unconscionable, it may be “unfair business conduct,” within the scope of the UCL.
As a next step, the Ninth Circuit will likely send the case back to the Northern District of California to consider whether the loan was, in fact, unconscionable. However, the California Supreme Court also cautioned that the unconscionability determination is not an easy one, noting high interest rates may indeed be justified because “loans made to high-risk borrowers often justify high rates.” In the end, it is up to the District Court to consider the “totality of the circumstances” to determine whether a loan is unconscionable or not—which makes it probable that unconscionability determinations will be made on a case-by-case basis. Time will tell whether plaintiffs will make similar arguments in other states when challenging short-term loans, though the success of those arguments is likely heavily dependent on individual states’ statutory schemes.