Facts
- CashCall, Inc. made unsecured consumer loans targeted to high-risk borrowers in California, typically in the amount of $2,600.
- The loans carried very high APRs, initially about 96% and later about 135%.
- CashCall structured the loans at or above $2,500, a threshold relevant because California’s statutory interest-rate caps apply to certain loans under $2,500 (Fin. Code § 22303).
- Plaintiffs (borrowers) filed a putative class action alleging the interest rates were unconscionable under Financial Code § 22302 and therefore “unlawful” under the Unfair Competition Law (Bus. & Prof. Code § 17200).
- The federal district court certified a class but granted summary judgment for CashCall, reasoning that loans of $2,500 or more could not, as a matter of law, be found unconscionable as to their interest rate because the Legislature did not cap rates for such loans.
- On appeal, the Ninth Circuit certified to the California Supreme Court whether the interest rate on consumer loans of $2,500 or more can render the loans unconscionable under Financial Code § 22302.
Issues
- Whether Financial Code § 22302 permits a court to find an interest-rate term unconscionable for consumer loans of $2,500 or more, even though § 22303’s rate caps apply only to certain loans under $2,500.
- Whether the absence of a statutory interest-rate cap for loans ≥$2,500 creates categorical immunity from unconscionability review of the interest rate.
Decision
- The California Supreme Court answered the certified question “yes.”
- The Court held that an interest rate is a “price term,” and price terms are not categorically exempt from unconscionability review.
- The Court rejected the argument that § 22303’s limited rate caps imply that interest rates on loans ≥$2,500 can never be unconscionable.
- The Court did not decide whether CashCall’s specific rates were unconscionable; it only clarified the governing state-law rule for the federal courts to apply on remand.
Legal Principles
- Financial Code § 22302 incorporates general unconscionability doctrine for covered consumer loans, including review of interest-rate (price) terms.
- The fact that § 22303 caps interest only for certain loans under $2,500 does not create a safe harbor for any interest rate on loans of $2,500 or more.
- Under California unconscionability doctrine, a term may be invalid if it is unreasonably harsh, unduly oppressive, or so one-sided as to shock the conscience.
- Unconscionability generally requires both procedural and substantive components, applied on a sliding scale; for price terms, courts may consider whether market conditions and borrower vulnerability indicate the price was not set by meaningful competition.
Conclusion
The California Supreme Court held that consumer loans of $2,500 or more are not immune from unconscionability challenges to their interest rates under Financial Code § 22302, leaving to the federal courts whether the challenged rates in this case were unconscionable.