District Court (Cal.) Finds Consumer Loans Violated EFTA/UCL Because Loans Were Conditioned on Consent to Automatic Withdrawal from Checking Account; Denied Defendant’s MSJ that its Loans Were Not Unconscionable

In de la Torre v. CashCall, Inc., — F.Supp.2d —-, 2014 WL 3752796 (N.D.Cal. 2014), Judge James granted partial summary judgment to class-action Plaintiffs on their allegation that CashCall’s the loans violated the UCL because they were conditioned on the debtors were required to check a box indicating that they authorized CashCall to withdraw their scheduled loan payments from their checking accounts on or about the first day of each month, which violated EFTA. Judge James denied CashCall’s summary judgment on Plaintiff’s claim that CashCall’s loans were unconscionable.

Plaintiffs also move for summary judgment on the Conditioning Claim, arguing that CashCall’s promissory note violated the EFTA because it required the class members to consent to preauthorized electronic fund transfers before it would fund a loan, which is conditioning the extension of credit on the borrower’s agreement to pay by EFT. Pl. Condit. Mot. at 6. Under Regulation E, the implementing regulation of the EFTA, “[n]o … person1 may condition an extension of credit to a consumer on the consumer’s repayment by preauthorized electronic fund trans-fers….” 12 C.F.R. § 205.10(e)(1); 15 U.S.C. § 1693k(1). The EFTA defines “preauthorized electronic fund transfer” as “an electronic fund transfer authorized in advance to recur at substantially regular intervals.” 15 U.S.C. § 1693a(10). The purpose of the EFTA is to define “the rights and liabilities of consumers, financial institutions, and intermediaries in electronic fund transfers,” with the “primary objective” of “the provision of individual consumer rights.” 15 U.S.C. § 1693. One such objective is protecting consumers from compulsory use of EFT services. Def. Condit. RJN, Ex. A, at p. 31 (House Congressional Record–August 11, 1978, p. 25733: “In section 912 [referring to what became § 1693k(1) ] we insure that consumers are not forced to use the EFT.”). The EFTA provides a private right of action for consumers, specifying that “any person” who fails to comply with any provision of the EFTA with respect to any consumer “is liable to such consumer.” 15 U.S.C. § 1693m(a). . . ¶ It is evident from the statutory language that the activity prohibited by section 1693k(1) is precisely the activity that CashCall engaged in here–” condition[ing] the extension of credit to a consumer on such consumer’s repayment by means of preauthorized electronic fund transfers.” A violation of section 1693k(1) thus occurs at the moment of condition-ing–that is, the moment the creditor requires a consumer to authorize EFT as a condition of extending credit to the consumer. As the statute’s plain language is unambiguous, the Court need only look to the legislative history to confirm that Congress did not mean something other than what it said. Williams, 659 F.3d at 1225. The EFTA’s legislative history confirms that Congress intended § 1693k(1) to prohibit creditors from conditioning the extension of credit on consumers’ agreement to repay their loans by EFT. Exh. A to Pl. RJN, p. 34 (“A creditor could not condition the extension of credit on a consumer’s agreement to repay by automatic EFT payments…. [A] creditor could not offer only loans repayable by EFT.”). Contrary to CashCall’s suggestion, this interpretation of the statute is fully consistent with the statutory purpose of insuring that “EFT develops in an atmosphere of free choice for the consumer” and “consumers are not forced to use EFT.” Id., p. 33 (Congressional Record–House, p. 25733). Thus, the legislative history of the EFTA confirms § 1693k(1)’s plain meaning: a creditor may not condition the extension of credit to a consumer on the consumer’s preauthorization of EFTs. . . ¶ The uncontroverted evidence thus demonstrates that during the Class Period, CashCall issued consumer loans only to borrowers who initially entered into a loan agreement containing an EFT authorization clause. CashCall’s loan application and loan agreement forms do not state that a consumer need not consent to EFT to obtain a loan from CashCall or explain how a consumer could obtain a loan from CashCall without consenting to EFT. To the contrary, checking the EFT Authorization box was a mandatory prerequisite to obtaining a loan. CashCall conditioned the extension of credit on consent to EFT by requiring Conditioning Class Members to check the EFT authorization box in order to submit their loan agreements, receive credit, and have their loans funded. Section 1693k(1) is unambiguous, and its purpose is clear. By conditioning its extension of credit to members of the Conditioning Class on Class Members’ agreement to repay their CashCall loans by means of preauthorized electronic fund transfers, CashCall violated the EFTA. See 15 U.S.C. § 1693k(1). Accordingly, the Court DENIES CashCall’s Motion and GRANTS Plaintiffs’ Motion for Partial Summary Judgment on the EFTA claim.

The District Court also denied CashCall’s Motion for Summary Judgment on Plaintff’s unconscionability claim.

CashCall argues that Plaintiffs cannot establish that the loans were substantively unconscionable because they have established that their interest rates and loan terms are justified by the risks of subprime lending. U nc. Mot. at 3. Plaintiffs contend that there exist a number of material issues with respect to whether the price of credit is substantively unconscionable. Particularly, Plaintiffs contend that the loan terms are oppressive on their face because they combine a high rate of interest with a lengthy repayment period, in which borrowers must repay interest prior to principal. Unc. Opp’n 9–21. Applying the price comparison factors set forth in Perdue, the Court finds that there are a number of factual disputes precluding a finding of substantive unconscionability on summary judgment. 38 Cal.3d at 927–28. a. There Are Triable Issues of Fact Regarding Price Comparability. Allegations that the price exceeds cost or fair value, standing alone, do not state a cause of action.” Morris, 128 Cal.App. 4th at 1323 (citing Perdue, 38 Cal.3d at 926–27) (citations omitted). Instead, courts look to “the basis and justification for the price, including ‘the price actually being paid by … other similarly situated consumers in a similar transaction.’ ” Id. “While it is unlikely that a court would find a price set by freely competitive market to be unconscionable, the market price set by an oligopoly should not be immune from scrutiny.” Id. CashCall contends that Plaintiffs cannot show that its interest rates are un-conscionable because they cannot show that Cash-Call’s interest rates compare unfavorably to “the price actually being paid by other similarly situated con-sumers in a similar transaction.” See Wayne, 135 Cal.App. 4th at 481. CashCall defines this comparison as between rates paid by borrowers for all subpri me consumer loans, regardless of their terms or length. Unc. Mot. at 22. CashCall contends that their rates compared favorably to other subprime products, such as auto title loans, payday loans, tax refund loans, and pawnshop loans, which carry higher APRs, shorter maturity dates, and require some form of security. Plaintiffs, on the other hand, argue that this is not a relevant comparison because there are significant differences between CashCall’s loans and other sub-prime loans. Plaintiffs’ economic and financial experts maintain that CashCall’s loans differed markedly from other subprime loans in terms and function. MacFarlane Rpt. at ¶ 81–89. Since CashCall’s product was unique and faced little or no competition, Plaintiffs argue that the interest rates do not represent the price set by a freely competitive market. Id. The Court agrees that this creates a factual dispute as to whether CashCall’s products were comparable to other subprime products. ¶ CashCall argues that the fact that Plaintiffs’ financial and economic experts (Levitin and Pinsonneault) disagree with Plaintiffs’ consumer protection and neuro-psychology experts (Saunders and Wood) as to the existence of comparable loans is fatal to their motion. Unc. Mot. at 22. The Court finds this argument unpersuasive as to Wood, given that her area of expertise is neuropsychology. As previously discussed, the Court also finds this argument unpersuasive as to Saunders. b. Whether Costs Justify the Price. CashCall maintains that its interest rates are jus-tified by the risk inherent in extending credit to sub-prime borrowers. Mot. at 2–3. CashCall’s high origination and servicing costs, high costs of funds, and high default rate also require CashCall to charge high interest rates to achieve its target profitability. Id. Plaintiffs maintain that the risk is largely self-imposed by CashCall because it combines its high interest rate with a 42–month repayment period that makes the loans unaffordable to most borrowers. Unc. Opp’n at 9–11. Plaintiffs contend that CashCall unfairly allocates its costs and risks to borrowers by aggressively marketing its product and lending to a large number of borrowers who cannot afford to pay the loan back. Unc. Opp’n at 15 (citing Seiling Decl. in Supp. of Unc. Mot. (“MacFarlane Rpt.”) at 14–23, Dkt. No. 172–1). Plaintiffs’ lead expert on CashCall’s business model, Bruce McFarlane, found that by pursuing a high-volume, unsecured lending model targeted at higher risk subpri me borrowers, CashCall incurs higher expenses in the form of advertising costs, cost of funds and default costs. MacFarlane Rpt. ¶ 99; see also Pl. Unc. Stmt. No. 25, Dkt. No. 196. This ultimately increases the APR CashCall must charge borrowers in order to achieve its targeted profitability. Id. Plaintiffs claim that it is the high interest rate, coupled with the lengthy repayment term, that unfairly increases the risk that borrowers will not be able to repay. Levitin Rpt. ¶ 99 (CashCall’s “sweatbox model” of lending is unfairly one-sided because lender still makes profit on defaults so long as they occur after the 15 or 16 month mark). CashCall argues that its high default rates are an inherent risk of lending to subprime borrowers. Unc. Reply at 8. Given the undisputed 45% default rate, CashCall argues that it does not unreasonably shift the risk of default to borrowers. See Shadoan v. World Savings & Loan Assn., 219 Cal.App.3d 97, 106 (1990) (finding it to be “less disturbing and less unexpected that a lender would shift the risk of market fluctuation to the party using the lender’s money.”). At 96% interest, it takes CashCall nine months to recover its principal loan amount of $2,600 and 14 months to recover its costs, which comprise on average 58% of the loan amount. McFarlane Rpt., ¶ 81. At 135% interest, it takes CashCall 12 months to recover its principal loan amount of $2,600 and 20 months to recover its costs. Id. The average life of the loans is 20 months. Pl. Unc. Stmt. No. 27, Dkt. No. 196. Mean-while, 45% of borrowers default on their loans. Id. Only a small number of borrowers take the loans to maturity. Id. Plaintiffs also do not factor in other impacts on CashCall’s profitability loss, such as a high prepayment rate of 45–50%. CashCall argues that there is thus no showing that they created a risk of default other than that inherent in making unsecured loans to subpri me borrowers.FN16 [FN16. Plaintiffs’ expert, Professor Levitin, provides comparative default rates for other subprime loans. Levitin Rpt. ¶ 82. While these default rates are much lower (ranging from 7% (for payday loans) to 29.63% (for adjustable rate subprime mortgage loans), Levitin does not provide a basis for com-paring these secured types of secured loans with CashCall’s unsecured loan products. Id.] CashCall also argues that cases of price unconscionability generally involve high price to value disparities. Unc. Opp’n at 16 (citing California Grocers Ass n, 22 Cal.App. 4th at 216.) By contrast, the cost of a signature loan is approximately 3.5 to 4.5 times the amount borrowed, which is not an unusually high price to value disparity. Id. (citing Perdue, 38 Cal.3d at 928 (profit estimates of 600 and 2,000 percent for NSF fee “indicate the need for further inquiry”)); Carboni, 2 Cal.App. 4th at 83–84 (interest rate approximately 10 times the prevailing rate); Jones v. Star Credit Corp., 298 N.Y.S.2d 264, 267 (sale of freezer on credit at triple its retail value plus credit charges exceeding value by more than $100)). c. The Value of the Loans to Consumers. In determining whether a price term is unconscionable, courts also consider the value being conferred upon the plaintiff. Morris, 128 Cal.App. 4th at 1324 (citing Carboni, 2 Cal.App. 4th at 84.) Plaintiffs contend that CashCall’s loans are harmful to consumers due to the inordinately high loan costs during the life of the loan. nc. Opp’n at 15 (citing Ex. 17 (Saunders Decl.) at p. 9). CashCall counters that the loans provided a legitimate benefit to borrowers because they did not require security, charged simple interest with no hidden fees or prepayment penalty, and allowed ample time for repayment where necessary. Unc. Mot. at 22. The Court finds there is a triable issue of fact with respect to whether CashCall’s loans provided value to the Class Members. Although there was evidence that the loans provided some value to borrowers by providing access to unsecured credit despite low credit scores, there was also evidence of harm due to the high cost of the loans. Levy Decl. in Supp. of Unc. Opp’n, Ex. 17 (Saunders Rpt.), p. 10. Borrowers paid a considerable amount for these loans both in terms of the monthly expenses and the total amount repaid. Id. It is undisputed that 45% of borrowers were unable to afford the cost of the loans after taking them out. Pl. Unc. Stmt., No. 41, Dkt. No. 196. Only a small percentage of borrowers in the Class paid the loans within one month of origination, thus avoiding paying interest. Id., No. 9. Accordingly, there is a triable issue as to whether the value of the loans outweighed the harm.