Can consumer loans be so expensive they break the law? California Supreme Court Says Yes

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The California High Court has ruled that interest rates on consumer loans can be so high that they become “unreasonable” and, therefore, illegal – a ruling that could call into question the validity of millions of loans. and disrupt the government subprime loan market.

Unanimously opinion delivered Monday morning, the California Supreme Court said that courts “have a responsibility to guard against provisions relating to consumer loans with unduly oppressive terms,” ​​including interest rates, despite state laws that have until ‘now allowed lenders to charge whatever the market supports.

California Loan Law sets maximum rates for loans up to $ 2,499, but no limit for loans of $ 2,500 and over. However, when lawmakers removed the interest rate caps on these larger loans in the 1980s, they included language that allowed the loan terms to be deemed “ineligible.”

Lawyers representing a class of CashCall borrowers in 2008 sued the company in federal court over lending rates and other terms that they said made the loans ineligible. The plaintiffs borrowed from CashCall at rates of 96% or 135% from 2004 to 2011.

Orange County-based CashCall offers consumer loans at interest rates exceeding 100%. His lawyers argued that by removing a cap on interest rates, the legislature intended to allow lenders to set their own rates. without interference state regulators.

The case, De La Torre v CashCall, is before the U.S. 9th Circuit Court of Appeals, which has asked the state High Court to rule on California loan law – particularly whether a high interest rate alone could be unreasonable and thus void a loan.

“The answer is yes,” wrote Deputy Judge Mariano-Florentino Cuéllar in an opinion signed by the seven judges.

The Supreme Court did not find, however, that CashCall’s rates were excessively high. The notice leaves it to state regulators and other courts to determine whether or when rates cross that threshold.

The ruling also failed to provide clear guidance on the matter, with Cuéllar stating that a court should only declare interest rates unreasonable if, given all the other conditions and facts of a loan, the rate is “hard conscience.”

The High Court recognized the difficult situation in which its opinion will put other judges.

“We recognize how intimidating it can be to determine the precise threshold between a simply onerous interest rate and an unreasonable rate,” Cuéllar wrote.

Many other states, including New York, place interest rate limits on these high dollar value loans, while some are largely unregulated. Monday’s notice only applies to loans made in California by state-approved lenders.

The De La Torre case will now return to the 9th Circuit and potentially to San Francisco Federal District Court for trial. Jim Sturdevant, a lawyer representing the borrowers in the case, said he expects a trial to take place next year.

He called Monday’s opinion a “spectacular and full-blown victory” for consumers.

Sturdevant said he intended to argue at trial that CashCall’s loans were unreasonable because of both interest rates and other loan terms, including repayment plans that stretch over years and high default rates. A CashCall executive said in court filing that 40% to 45% of CashCall borrowers default on their loans.

Sturdevant customers have sued CashCall under California’s Unfair Competition Act, which has a four-year statute of limitations. This could mean that any borrower who has taken a high interest loan in the past four years could try to sue their lender by asking for an unreasonable interest rate.

Last year alone, state-approved lenders in California granted more than 350,000 consumer loans with interest rates of 100% or more. These loans, which have become more and more common, often have payment plans that span years, which means borrowers can wind up pay several times the original loan amount.

Monday’s opinion could have big implications for the California credit market, causing confusion and concern among high-interest lenders, said Catherine Brennan, a partner at Hudson Cook law firm that represents lenders at the consumption.

“If you have RPAs that are high, you need to look at your program in California,” she said.

As lenders wait for a result in the De La Torre case and seek more clarity on rates and terms that could offend judges, Brennan said some lenders could cut or stop their lending.

“There is no clear line,” she said. “It is this uncertainty that will squeeze credit in California.”

Lenders did the same in submissions to the state’s Supreme Court this spring.

Several business groups, including the Online Lenders Alliance and the California Financial Service Providers Assn., Have said a move that rates can be excessively high “would disrupt the strong market for these loans” and force lenders “to cut back. credit offers or to exit the market. Marlet.”

Groups were particularly concerned that a finding in favor of De La Torre could mean judges could overturn loans made years ago and lenders could find themselves inundated with consumer lawsuits.

“The possibility of litigation brought by each borrower long after the loan is granted … will dramatically increase costs,” the groups wrote.

CashCall’s business groups and lawyers did not respond to requests for comment on Monday.

Brad Seiling, a partner at Manatt Phelps & Phillips law firm that represents CashCall, told judges in June that under current law, lenders can charge anything the market will support. Associate Justice Leondra Kruger asked if this would include interest rates of millions of percent. Seiling said yes.

“Under the law, as drafted, yes that rate would be allowed under the law,” he said, although he also said he believed the rates were not would never reach such a high level because no customer would take out such a loan.

“The market regulates these interest rates,” he said. “In a freely competitive market, if someone advertises ‘Come and get my 1000% loan’, that lender will be bankrupt.”

CashCall was one of the first players in this market, but it is not the only one to offer loans with triple-digit interest rates in California.

In each of the past three years, the majority of loans of $ 2,500 to $ 5,000 – the most common size range followed by state regulators – have carried rates of 100% or more. Hundreds of thousands of these loans are made every year. By comparison, in 2007, lenders made only 870 loans of this size and interest rate range.

The growing popularity of these expensive loans had led to new efforts to curb the industry, some parts of which are more strictly regulated than others. California law limits the fees that lenders can charge for payday loans, which cannot exceed $ 45 for a loan of $ 255. The state also caps interest on loans of up to $ 2,500 at 20-30%.

Over the past two years, state lawmakers have introduced a handful of bills that would cap interest rates on loans over $ 2,500, but no bills have yet been passed by the Assembly. legislative.

Graciela Aponte-Diaz of the Center for Responsible Lending, an advocacy group that has advocated rate caps and other regulations, said the court ruling could prompt lawmakers to pass some sort of rate cap rather than to let the courts determine what rates are acceptable. She also said the opinion and the uncertainty it may generate could push lenders to support some sort of cap.

“I hope this will bring [lenders] back to the table, ”she said.

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Twitter: @jrkoren


UPDATES:

4 p.m .: This article has been updated with more information on the California consumer loan industry.

1:45 p.m .: This article has been updated with more details about the case and the decision, along with comments from plaintiff attorney Jim Sturdevant and Graciela Aponte-Diaz of the Center For Responsible Lending.

This article was originally published at 11:25 a.m.

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