California law strictly limits interest rates on loans of less than $2,500, and sets no numerical ceiling on interest for higher loans. But rates on loans for $2,500 or more can nevertheless be so oppressive — or “unconscionable” — that they violate the law, the state Supreme Court ruled Monday.
In a class-action suit filed in San Francisco against the prolific lending company CashCall, the court ruled unanimously that state regulators, or judges, could intervene whenever interest rates are “unreasonably and unexpectedly harsh.” The court did not offer a numerical formula, and said enforcement should start with the state Department of Business Operations, formerly known as the Department of Corporations.
CashCall specializes in consumer loans to high-risk borrowers. From 2006 to 2011, the period covered by the suit, the company offered unsecured $2,600 loans, payable over 42 months, with interest rates of 96 percent, later increased to 135 percent.
The company now charges 210 percent interest for those loans, with interest amounting to four times the amount of the loan or more, said James Sturdevant, lawyer for the borrowers who filed the suit. Its advertising slogan is “Make the CashCall.”
CashCall defended itself by citing the 1985 state law that set maximum interest rates for lenders: 2.5 percent per month for loans of up to $225, declining amounts for larger loans, and 1 percent per month for loans between $1,650 and $2,499. The company argued, and a federal magistrate agreed, that loans of $2,500 or more were not regulated by California law.
But the state’s high court, asked by a federal appeal court for an interpretation of state law, said the 1985 statute explictly banned loans of any amount that were found to be “unconscionable.”
Under a law that is meant to protect consumers, “courts have a responsibility to guard against consumer loan provisions with unduly oppressive terms,” Justice Mariano-Florentino Cuéllar said in the 7-0 ruling.
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