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Financial Services Law Insights and Observations

California Supreme Court says loans not subject to state interest rate caps may still be unconscionable

State Issues Courts Usury Consumer Finance Installment Loans Ninth Circuit Appellate

State Issues

On August 13, the Supreme Court of California held that interest rates on consumer loans of $2,500 or more could be considered unconscionable under Section 22302 of California’s Financial Code, notwithstanding Section 22303’s maximum interest rate cap for loans under $2,500. The U.S. Court of Appeals for the 9th Circuit asked the Supreme Court of California to address Section 22302’s application to higher cost consumer loans. In the class action that is before the 9th Circuit, consumers alleged that a lender violated the “unlawful” prong of California’s Unfair Competition Law (UCL) with an unsecured $2,600 loan carrying an APR between 96 percent and 136 percent and argued the product is “unconscionable” under Section 22302. To resolve this question, the California Supreme Court held that unconscionability is a “flexible standard” that includes the larger context surrounding the contract. The court held that, although Section 22303 specifies interest rate limitations on loans under $2,500, it does not affect whether a loan in excess of $2,500 is unconscionable, and a court may consider a loan’s interest rate in determining that a loan above this threshold violates Section 22302.