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California Supreme Court Empowers The DBO And The Courts To Regulate Interest Rates

Section 22303 of the California Financial Code establishes the maximum interest rates applicable to loans less than $2,500.  The preceding section incorporates by reference the general Civil Code provision about contract unconscionability, Section 1670.5(a).  Does this mean that a lender may charge interest rates usque ad caelum or may a court determine the interest rate on consumer loans of $2,500 to be unconscionable?  That was in effect the question certified by the Ninth Circuit Court of Appeals to the California Supreme Court last year.  I found the certified question to be a bit more confusing: 

"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?"

De La Torre v. CashCall, Inc., 854 F.3d 1082, 1085 (9th Cir. 2017).  On Monday, the California Supreme Court gave its answer:

"With roots predating the Anglo-American legal tradition, the doctrine of unconscionability has been used to temper the consequences of certain bargains arising in the course of economic life. The California Legislature is entitled to subject loan transactions, like other contracts, to the unconscionability doctrine's nuanced blend of tractability and protection of human dignity. It did so here.

In doing so, the Legislature chose to retain the flexible standard of unconscionability even as it did away with interest caps on consumer loans of $ 2,500 or more.  By its action, the Legislature recognized to some degree how commerce depends on fairness, and functioning markets on meaningful choices.  Although courts must proceed with caution in this area, the possibility that an interest rate is unconscionable in a particular context is not so different relative to any other kind of potential contractual defect that it justifies concluding that courts lack power or responsibility to address unconscionable interest rates.  In light of the Legislature's choice, as reflected in the text, context, and history of the relevant statutory provisions and the unconscionability doctrine, we conclude the interest rate on consumer loans of $ 2,500 or more may render the loans unconscionable under section 22302 of the Financial Code."

De La Torre v. Cashcall Inc., 2018 Cal. LEXIS 5749.

The Supreme Court was unfazed by the prospect of the courts becoming the final arbiters of interest rates on consumer loans.  In the court's view, the concept of unconscionability is context-specific and malleable.  Therefore, the courts would not be setting caps per se.  Although the Supreme Court did not decide the question of class certification in this case, these comments would seem to make certification very challenging or even impossible.  The Supreme Court also did not foresee a flood of litigation due to the limited remedies available.  We will only have to wait to find out whether that will be the case.

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