Recently, the California Supreme Court issued a judgment in a case that sent shockwaves through the lending sector, determining whether interest rates are “unconscionable” under California’s Unfair Competition Law (“UCL”). Although the case originated in consumer finance, it is conceivable that this precedent will be applied to business purpose loans, commercial financing, and even some private money loans in the future.
The California Supreme Court acknowledged in re DeLaTorre v. CashCall, Inc. that courts “have a responsibility to guard against consumer loan arrangements with unreasonably harsh conditions.” As a result, notwithstanding the California Financing Laws, which allow lenders to charge whatever rates they presume are rational due to market situations and risk, the Supreme Court determined that interest rates on consumer loans could be deemed excessive depending on a range of factors, including the borrower’s negotiating power.
In essence, the Court concluded that interest rates are a loan’s “price” and that, like any other price, an interest rate can be declared unconscionable if it contains “unreasonably and unexpectedly harsh terms” that “shock the conscience.” In addition, if the loan is judged to be unconscionable, it could be considered “unfair commercial conduct” under the Unfair Competition Law.
This decision will undoubtedly strengthen other borrowers who want to oppose the enforcement of a promissory note in the future. If lenders can inform their borrowers with clear and straightforward language about exceptionally severe restrictions or increased rates ahead of time, they are less likely to face litigation. For example, draw the borrower’s attention to specific text in the loan agreement and initial relevant areas, indicating that they understand the terms.
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