California Supreme Court rules interest rates may be “unreasonable”

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Last Monday, the California Supreme Court ruled that interest rates on loans over $ 2,500 could be considered “ineligible” even if usury laws allow it. In De La Torre v CashCall, the court was asked to dispel an ambiguity in California Finance Lender’s Law as to whether the interest rate on consumer loans of $ 2,500 or more made loans ineligible under section 22302 of the Financial code. The court answered “yes”.

Although California only sets interest rate caps on consumer loans below $ 2,500, we do not derive from the analysis of the law setting these rates (Section 22303 of the Financial Code) the implication that a court can never rule ineligible an interest rate on a loan of $ 2,500 or more.

The case is relatively straightforward. Section 22303 of the Financial Code deregulated interest rates so that the market could set rates above $ 2,500. But at the same time, section 22302 was added to allow all loans to be considered non-repayable under the appropriate circumstances. Legislative history indicates a compromise, freeing larger loans from usury laws while maintaining a standard of unfairness in consumer protection. While one might rightly quibble over the wisdom of this policy, the court found no conflicting issues in the law itself, bound by what may simply be considered ill-conceived law.

The implications of the ruling, however, are large, introducing a tremendous amount of uncertainty into the California loan market, with judges now being asked to determine when a loan agreement becomes ineligible. The California Supreme Court has recognized the difficulty of this requirement. “We recognize how disheartening it can be to determine the precise threshold between a simply onerous interest rate and an excessive rate… This responsibility is a responsibility that the courts must pursue with caution.” The task is indeed daunting. When does a high interest rate become so high that it is ruled ineligible? Does it depend on the level of competition in the market, the structure of the loan or subscription terms, the marketing practices employed, or all of the above? All of these factors are likely to be strongly contested without clarification from the California legislature. And of course that will mean California judges will write de facto economic policy in the process.

Although the Court said that they can determine if a loan may be excessive because of its interest rate, it has issued a judgment should do it. The court stressed that any analysis must be “strongly context dependent” and “flexible” in determining whether a particular rate was “too harsh” or “unduly oppressive”. He also warned lower courts to be wary of “the widespread imposition of a cap on interest rates” in their decisions. The burden of proof to prove claimants’ claims is also high, given that they would have to prove that the lender was operating in an uncompetitive market and therefore charging exorbitant interest rates reflecting rents instead of a true valuation. risk.

But without the assurance that high-risk installment loans will not be attacked for their associated high interest rates, one can expect there to be serious disruption for state-approved lenders. For example, years of litigation have led CashCall itself to stop making personal loans. This means that marginal consumers, whose risk profiles call for high interest rates, will be pushed into increasingly worse financial options, which is hardly the goal of the legislatures that made the lending laws.

To maintain financial stability and access to credit, California lawmakers must correct the loophole in their lending laws highlighted by From La Torre. Simply repealing section 22302 would solve the problem, as would amending the law to clarify that interest rates cannot be ruled ineligible.

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