California Supreme Court Says Courts Have Authority to Declare Interest Rates on Small Loans Unconscionable

Although California sets interest rate caps only on consumer loans less than $2,500, we do not glean from the statute setting those rates — section 22303 of the Financial Code — the implication that a court may never declare unconscionable an interest rate on a loan of $2,500 or more.  Nothing in our unconscionability doctrine, in section 22303, its neighboring section 22302, or anything else shedding light on the purpose of the relevant statutes supports such a reading. Indeed, when read together, sections 22302 and 22303 tend to show how the Legislature’s purpose in enacting these provisions was to free larger-denominated debts from the rigid regulation of usury rates, without rendering irrelevant to those transactions the flexible standard of unconscionability long rooted in both statutes and California common law. We recognize how daunting it can be to pinpoint the precise threshold separating a merely burdensome interest rate from an unconscionable one. But that is no reason to ignore the clear statutory embrace here of a familiar principle –– that courts have a responsibility to guard against consumer loan provisions with unduly oppressive terms. (Perdue, supra, 38 Cal.3d at p. 925.)    That responsibility is one courts must pursue with caution. Unsecured loans made to high-risk borrowers often justify high rates. Both consumers’ acceptance of such rates, as well as restrictions on them, may trigger unintended consequences. (See, e.g., Bhutta et al., Consumer Borrowing after Payday Loan Bans (2016) 59 J. Law & Econ. 225, 247 [finding that “although payday loan regulations reduce the usage of payday loans, many consumers turn to other forms of high-interest credit”].) Wary of such consequences and cognizant of the limits of its power, a court declares unconscionable only those interest rates that — in light of the totality of a transaction’s bargaining context — are so “unreasonably and unexpectedly harsh” as to be “unduly oppressive” or “shock the conscience.” (E.g., Sanchez, supra, 61 Cal.4th at pp. 910–911.) But nothing in California law prohibits a court from making an inquiry into the nature of a consumer loan agreement of at least $2,500 and the interest rate provided therein.