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CA Supreme Court holds high-interest loans may be subject to price unconscionability attack

Resolving an ambiguity in the California Finance Lender’s Law (CFLL), the California Supreme Court unanimously held that borrowers may use the unconscionability doctrine to challenge the interest rate on consumer loans of $2,500 or more, despite the fact that the CFLL has deregulated interest rates on such loans.  Although unconscionability claims of this nature will be difficult to prosecute, the decision creates heightened risk for nonbank consumer lenders doing business in California, particularly when lending at high rates.  Furthermore, because the decision could be followed in other states or applied in other contexts, such as small business lending, it also could impact loans made under other statutes that have deregulated interest rates, as opposed to statutes that affirmatively authorize interest rates established by contract.

In addition to copycat lawsuits by private plaintiffs alleging their interest rates are unconscionable, high-rate lenders could even face enforcement actions challenging their rates.  In California, it is possible that the state’s Attorney General, local prosecutors, or the California Department of Business Oversight (which has regulatory and supervisory jurisdiction over CFLL licensees) will pile on.

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Scott Pearson, Ballard Spahr Law Firm, Los Angeles, Business Litigation Attorney
Partner

Scott Pearson focuses his practice on the defense of regulatory enforcement actions and class actions, other complex business litigation, and regulatory compliance counseling. Martindale-Hubbell rates Mr. Pearson "at the highest level of professional excellence." He has been called "a true expert in complex litigation and consumer class actions" and "a no-nonsense bulldog lawyer who is highly respected by his peers and the judiciary."

Prominent companies regularly entrust Mr. Pearson with matters involving bet-the-company exposure or extreme...

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Jeremy T Rosenblum, consumer financial services group, finance partner, Philadelphia, Pennsylvania, Ballard Spahr, UDAAP, TILA
Partner

Jeremy T. Rosenblum is Co-Practice Leader of the firm's Consumer Financial Services Group. He has devoted the past 30 years in private practice to representing the consumer financial services industry.

Mr. Rosenblum's practice focuses on federal and state lending and consumer practices laws, with emphasis on the interplay between federal and state laws, joint ventures between banks and nonbank financial services providers, the development and documentation of new financial services products (especially products designed to serve the needs of unbanked and under-banked consumers), bank overdraft practices and disclosures, geographic expansion initiatives, and compliance with federal and state consumer protection and usury laws, including "UDAAP" statutes prohibiting unfair, deceptive, and abusive acts and practices; the Truth in Lending Act (TILA); the Electronic Funds Transfer Act; E-SIGN; the Equal Credit Opportunity Act; and the Fair Credit Reporting Act (FCRA).

Mr. Rosenblum's practice involves regular dealings with industry trade groups and regulators. In this regard, he has drafted a number of amicus curiae briefs, to the U.S. Supreme Court and other courts, on behalf of a number of industry and business trade groups, including the American Bankers Association, the Consumer Bankers Association, the U.S. Chamber of Commerce, the Mortgage Bankers Association, the Financial Services Roundtable, and the American Financial Services Association.

In addition to his consumer financial services regulatory and litigation practice, Mr. Rosenblum represents banks, thrifts, and other entities in charter transactions; mergers, acquisitions, and conversions; asset securitizations; purchases of loan servicing rights; and public offerings and private placements of equity and debt instruments.

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