Although the California Finance Lenders Law (the CFLL) does not limit the interest rates that may be charged on loans of $2,500 or more, Section 22302 of the law expressly states that loans made under the CFLL may be held unconscionable, and that such a finding triggers a violation of the CFLL and application of its remedies. In De La Torre v. CashCall, a class action attacking rates, the California Supreme Court will decide whether interest rates can be held unconscionable on CFLL loans of $2,500 or more, notwithstanding the Legislature's decision not to regulate interest rates on those loans.

In 2014, a federal district court granted summary judgment to CashCall, concluding that application of California unconscionability principles to the loans in question would involve the courts in "impermissible economic policy-making." However, the U.S. Court of Appeals for the Ninth Circuit has asked the California Supreme Court to weigh in on this issue of state law and the court agreed to decide whether "the interest rate on consumer loans of $2,500 or more governed by California Finance Code section 22303 [can] render the loans unconscionable under section 22302."

Consistent with the views of the California Department of Business Oversight (DBO)—the licensing authority under the CFLL—most consumer financial services lawyers have concluded that "[s]tate law does not restrict interest rates on CFLL loans of $2,500 or more" and treated the CFLL's deregulation of interest rates the same as statutes in other states that explicitly authorize interest charges agreed upon by contract. The California Supreme Court's decision in CashCall will have important implications nationwide regarding whether this view is correct. In California alone, this is no minor issue: In its press release, the DBO noted that "more than half of the non-bank consumer installment loans for $2,500 to $4,999 … carried [annual percentage rates] of 100 percent or higher in 2016."

Even if the court concludes that the rates on CashCall's loans can factor into an unconscionability analysis, the plaintiffs will continue to have an uphill battle in establishing their claims. Under California law, it will be their burden to establish unconscionability—yet they have failed to present essential evidence, including indications that CashCall operated in a noncompetitive market or charged interest at rates that departed significantly from rates charged by competitors; CashCall's rates were excessive in relation to its costs; and/or CashCall generated excessive profits. Indeed, on all of these questions, CashCall would seem to have the better of the argument on the merits (although, on high-rate loans, visceral reactions by the court can sometimes trump strict application of legal principles).

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.


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