California Supreme Court Rules that Consumer Loans Not Subject to Usury Cap May Still Be Deemed Unconscionable

By Mark Hargrave and Lauren Haahr

On Monday, August 13, the California Supreme Court unanimously ruled that the interest rate on a consumer loan in California can be deemed illegally high, even if the loan was not subject to the state’s usury cap.

Currently, California law sets interest rate caps only on consumer loans less than $2,500. The defendant in this case, CashCall, Inc., is a nonbank lender of consumer loans to high-risk borrowers. One of CashCall’s signature products was an unsecured $2,600 loan, payable over a 42-month period, and carrying an annual percentage rate of either 96 percent or, later in the class period, 135 percent. The plaintiffs in this case took such loans from CashCall and allege that the provision of these loans violates California’s Unfair Competition Law (UCL). The plaintiffs also argued that these high interest rates make such loans unlawful, and therefore unconscionable, under the UCL.

Initially, CashCall succeeded on its motion for summary judgment in the District Court for the Northern District of California. The District Court stated that it would not "second-guess" the California Legislature's policy decision not to cap interest rates on loans exceeding $2,500, because it would "impermissibly intrude" into economic policy. After the plaintiffs appealed, the Ninth Circuit certified the question to the California Supreme Court.

The Supreme Court ruled that an interest rate on consumer loans of $2,500 or more may be deemed unconscionable under UCL. The Supreme Court stated that "just because loans of at least $2,500 are not subject to a numerical ceiling on the interest rate does not mean that they cannot be found unconscionable." The Supreme Court then ruled "to declare an interest rate unconscionable means only that, under the circumstances of the case, a particular rate was 'overly harsh,' 'unduly oppressive' or 'so one-sided as to shock the conscience.'" The Supreme Court further stated that a bright-line test is inappropriate for these types of determination of unconscionability and that "unconscionability is a flexible standard" and is "highly dependent on context."

The Supreme Court did not issue a ruling on the merits of whether the interest rates on these loans were unlawfully high. Therefore, it is up to the lower court to examine not only the interest rate, but also "the larger context surrounding the contract, including its commercial setting, purpose, and effect" to determine whether the interest rate was unlawfully high under the circumstances.

For more information on the California Supreme Court's ruling, please contact Mark Hargrave or the Stinson Leonard Street contact with whom you regularly work.

Lauren Haahr is an associate at Stinson Leonard Street. Her MN license is currently pending. She is licensed to practice law in MD and DC.


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