## Facts

- In 1981, Betty L. Besta obtained a consumer loan from Beneficial Loan Co. of Iowa (“Loan I”) for a stated $1,000 request, structured at 24% APR over 36 months with $58 monthly payments and an insurance premium charge.
- Besta made 18 payments on Loan I, then sought an additional $500 for home improvements.
- A Beneficial employee who handled Loan I contacted Besta and offered to arrange additional financing through Beneficial.
- On May 2, 1983, Beneficial made a second loan (“Loan II”) that refinanced the unpaid balance of Loan I and advanced additional funds, resulting in a principal amount of $2,598.23.
- Loan II carried a 72-month term at 28.09% APR with $75 monthly payments and required repayment totaling $5,400, including $2,801.77 in interest.
- Loan II included substantially increased add-on charges (including insurance premiums of $972 and recording fees of $184), and the record did not clearly establish that Besta received any refund or credit for unearned insurance from Loan I after refinancing.
- The loan terms were discussed by telephone; Besta later went to Beneficial’s office to sign documents that had been prepared in advance.
- After Loan II, Besta lost her job, fell behind on payments, and Beneficial initiated foreclosure-related action; Besta sued seeking rescission on unconscionability grounds, and Beneficial counterclaimed for the unpaid balance.

## Issues

1. Whether, under Iowa law, Loan II could be found unconscionable based on its structure and cost, including high add-on charges and refinancing terms.
2. Whether a lender’s failure to disclose a readily available, substantially less expensive loan structure it could have offered supports a finding of unconscionability, even if statutory disclosure requirements were met.
3. Whether the district court erred by dismissing the unconscionability claim as a matter of law and entering judgment for the lender on its counterclaim.

## Decision

- The Eighth Circuit reversed the district court’s dismissal of Besta’s unconscionability claim.
- The court held that, on the record presented, the transaction could be found unconscionable under Iowa law, and the claim should not have been foreclosed as a matter of law.
- The case was remanded for further proceedings consistent with permitting Besta to pursue relief (including potential rescission) based on unconscionability.

## Legal Principles

- Under Iowa unconscionability doctrine in consumer credit transactions, courts may consider both substantive unfairness (excessive cost and fee structure) and procedural factors (oppression, unfair surprise, and inequality in bargaining position).
- Technical compliance with federal disclosure statutes (including Truth in Lending) does not preclude a finding of unconscionability under state law when the overall transaction is unfair.
- Evidence that a lender could readily offer materially cheaper terms, yet failed to inform the borrower of that alternative, may support unconscionability as conduct amounting to unfair dealing.
- In evaluating unconscionability, a court may consider whether loan structuring choices and add-on charges functioned to increase the borrower’s cost and the lender’s leverage (including use of collateral) beyond what was necessary to provide the requested additional funds.

## Conclusion

The Eighth Circuit held that a refinanced consumer loan transaction may be unconscionable under Iowa law where the lender structured the refinancing to be significantly more expensive and failed to disclose readily available, cheaper alternatives, requiring reversal of the district court’s dismissal and remand for further proceedings.


Besta v. Beneficial Loan Co. of Iowa, 855 F.2d 532 (8th Cir. 1988)