Lower payday loans can still be usurious, California judges say


(CN) – Interest rates on consumer loans of $ 2,500 or more may be considered unreasonable under California loan laws, the state’s High Court ruled on Monday.

The California Supreme Court’s affirmative response to a question posed by the Ninth Circuit sends the court of appeals a ten-year-old federal lawsuit that could dramatically change the lending landscape in California.

Thirty years ago, state lawmakers passed a deregulation bill that removed interest rate caps on loans of at least $ 2,500, but also gave courts the power to deem the rates unreasonable.

Lawyers for CashCall argued that the legislature intended to exempt loans of $ 2,500 or more from interest rate regulation, otherwise they would not have removed the caps.

The Supreme Court disagreed. When State Senator Rose Ann Vuich introduced the deregulation bill in 1985, it lacked this protection against unfairness. But two weeks after receiving a letter from then-Attorney General John Van De Kamp expressing concern over the lack of consumer protection against unreasonably harsh interest rates, Vuich added the protection now contained in the article 22302 of the Financial Code.

“This sequence of events rightly suggests that the legislation that became Section 22302 was enacted to allay fears that the removal of interest rate caps would leave consumers unprotected against interest rates. exorbitant “, wrote the judge Mariano-Florentino Cuellar unanimously. to research. “By passing this law, the legislature ensured that inequity would protect against such excesses on the part of lenders.”

He added: “Fundamentally, CashCall fails to persuade that removing an interest rate cap is tantamount to shielding the interest rate from a finding of unfairness.”

CashCall, based in the city of Orange, California, has been a pioneer in the field of high interest consumer loans for borrowers with low credit scores. One of his signature offers is an unsecured loan of $ 2,600, repayable over a period of 42 months with a variable interest rate ranging from 96 to 135%.

Eduardo De La Torre filed a federal class action against the lender in 2008. He had taken out such a loan as a UCLA student in 2006 and could not afford to repay CashCall the $ 9,000 he owed with an interest rate of 98%. De La Torre claims that the so-called payday loan violated California Unfair Competition Law as being unreasonable.

But a federal judge ruled in 2014 that finding CashCall’s interest rates unreasonably harsh “would unacceptably require the court to regulate economic policy,” an area that falls strictly within the purview of the legislature.

De La Torre and the class of borrowers appealed to the Ninth Circuit, which asked the California Supreme Court to rule on the issue of interest rate abuses.

Cuellar said the legislature clearly intended the courts to have a say. “By making an abusive loan a violation of the financing law and therefore liable to prosecution under the UCL, the lawmaker has made it clear that the courts must tackle such actions,” he said. writing.

In an interview, Graciela Aponte-Diaz, California policy director at the Center for Responsible Lending, praised the strengthening of the decision to protect consumers from unscrupulous payday lenders.

“This is great news for consumer protection. Borrowers can now take cases to court and determine whether these rates are unreasonable, ”she said.

Aponte-Diaz said payday loans and other high-interest loans have long benefited vulnerable borrowers, and the time has come for lawmakers to do something about it.

The 2015 California Department of Business Oversight annual report noted that 54% of high-cost installment loans of $ 2,500 to $ 10,000 had interest rates of 100% or more.

“We now want to push the state legislature further to push for an interest rate cap on loans.

It is certainly better for the state legislature to draw a line because we leave a lot of uncertainty if people should take cases to court, ”Aponte-Diaz said.

In an interview, consumer credit attorney Allen Denson, whose Washington-based firm Hudson Cook has been following the case closely, said Monday’s decision opens the door to rate regulation. interest by the courts.

“This is definitely a big blow for CashCall,” he said. “They didn’t necessarily lose the case, but the California Supreme Court said it was a viable theory that you can move forward on. What’s interesting to me is that I think that this will be the first of many lawsuits to test this theory. [courts] can still find loans are unreasonable. And where is the line?

He added: “The enterprising lawyers of the plaintiffs are definitely going to start testing it. This opens the door for the courts to implicitly set interest rate caps. ”

Over the past two years, state lawmakers have introduced bills that would have reinstated interest rate caps on larger consumer loans.

House Bill 1109 from House Member Ash Kalra, D-San Jose, reportedly capped interest rates at 24% for consumer loans from $ 2,500 to $ 10,000. This bill died on the Assembly Banking Committee chaired by Assembly Member Matt Dababneh D-Encino, who resigned last year amid allegations of sexual misconduct.

Another Kalra bill, AB 2500, to cap interest rates at 36% on loans between $ 2,500 and $ 5,000, was defeated in the assembly this year.


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