California Payday Loan Provider Shut Down Due to “Unconscionable” APRs

Inside Subprime: Aug 20, 2018

By Ben Moore

A California payday lending company based in Orange County, recently faced a lawsuit due to charging interest-rates that customers said were unethical, claiming the business implemented “unconscionable” annual percentage rates (APRs). The California Supreme Court released an opinion on the case (in Eduardo De La Toree, et al. v. CashCall, Inc.) and ruled that APRs on consumer loans that exceed $2,500 could be deemed unconscionable at certain percent thresholds. The ruling was held under section 22302 of the California Financial Code. Although there are only interest rate caps placed on consumer loans less than $2,500, the California Supreme Court determined that lenders “still have a responsibility to guard against consumer loan provisions with unduly oppressive terms” for loans that exceed $2,500. The Court made a point to lenders to cautiously exercise this responsibility and recognized that unsecured loans that are provided to “high-risk” borrowers are usually justified in their high interest rates.

The California payday loan provider was an early adopter in the payday lending space, being one of the first Californian companies to offer high-cost loans to high-risk customers. Founded in 2003, they remained the largest payday lender in the state for years. The company even used Gary Coleman in a series of famous ads around Orange County. From 2006 until 2011, The lender offered $2,600 payday loans, which could be paid back over a period of 42 months, with APRs at 96 percent, which later increased to 135 percent. After 2011, the business moved to even higher interest rates of 210 percent, making it possible for the interest on loans to be over four times the actual loan amount. The company defended the high interest rates by citing a state law set in 1985 that implemented maximum interest rates for lenders for loans up to $2,499, arguing the law did not cover loans over $2,500.

Once the lender tried to expand nationwide, troubles began to arise. The Consumer Financial Protection Bureau (CFPB) sued the company in 2013 after finding it was using tribal land in South Dakota to bypass interest rate laws. A federal judge ruled in favor of the CFPB, but only ordered the company to pay a fraction of the refunds the CFPB was looking for: $10.3M vs. the asked amount of $287M. The judgement has been appealed by the bureau in hopes of seeing a bigger payout from the company.

Now, the lender has apparently closed its doors, ending a 15-year payday lending business. Their website no longer features a loan application, and customer representatives are reporting that the company stopped making loans in July of this year. Justice Mariano-Florention Cuéllar, the Californian judge who ruled that the interest rates could be deemed unconscionable, stated that state “courts have a responsibility to guard against consumer loan provisions with unduly oppressive terms” and that courts must move cautiously in the future since past “crackdowns” on payday loans have not been successful in protecting consumers.

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