Alternative Finances

CashCall, Courts And California’s Increasingly Confusing Lending Market

Headquartered in Orange County, California and founded in 2003, CashCall is a big firm that consumers likely know best from its early commercials featuring the late Gary Coleman.

The ad itself seems somewhat silly, which is probably why it is so memorable, but CashCall is far from a joke. During its 15 years in business, the firm grew up to be the largest lender of its kind in the state of California.

CashCall is into a few different types of underwriting, but its main business — and the one for which it is best known — is high-interest installment loans for customers. A payday loan alternative, CashCall loans are mostly pitched to consumers with weak or thin credit, and offer longer repayment terms to repay in full than the couple of weeks customers normally get to repay a regular payday loan.

At least, they did. According to reports in the LA Times, CashCall is no longer offering an online loan application on its website, and a call to customer services indicated that CashCall officially stepped out of the personal loans to consumer businesses about a month ago. That’s because, particularly in the last five years or so, CashCall’s existence has become somewhat more legally fraught as it increasingly faces the ire of consumer groups, judges and regulators over the products it offers.

All that to say this has been an especially tough week for CashCall, and possibly the entire installment lending industry in the state.

The California Court Loss

In a ruling earlier this week, California’s high court found that a consumer loan can have interest rates so high that they become “unconscionable” and, therefore, illegal. A unanimous ruling released on Monday (Aug. 13) morning, the California Supreme Court said courts “have a responsibility to guard against consumer loan provisions with unduly oppressive terms.”

Under California law, there are maximum rates that can be charged on loans up to $2,499, but there is no cap on loans of $2,500 and up. However, when those caps were moved in the 1980s, lawmakers included language in the legislation that noted rates could be found “unconscionable.” The law did not, however, specify what that might mean.

A class of borrowers, who brought a suit against CashCall in 2008, argued that the interest rates charged — in combination with other elements of the loans’ terms — made them unconscionable. The plaintiffs borrowed from CashCall at rates of 96 percent or 135 percent between 2004 and 2011. Arguing for CashCall, defense attorneys argued that the legislature intended to allow lenders to set their own rates, which is why caps were removed in the first place.

That case is currently before the 9th Circuit Court of Appeals, which kicked it back down to the California state high court, looking for a ruling as to whether or not a high interest rate alone could be considered unconscionable and, thereby, void a loan under California state law.

“The answer is yes,” Associate Justice Mariano-Florentino Cuéllar wrote in an opinion signed by all seven justices.

Notably, though, the court did not rule that CashCall had a rate that was unconscionably high — that determination the court kicked back to state regulators and other courts to decide. Moreover, the court’s further guidance seems to indicate that factors other than interest rate should be in play in deciding the validity of a loan. Cuéllar wrote that a court should only declare interest rates unconscionable if, given all the other terms included in the loan, the rate is “unreasonably and unexpectedly harsh” as to “shock the conscience.”

The court further noted that this is not an obvious determination to make.

“We recognize how daunting it can be to pinpoint the precise threshold separating a merely burdensome interest rate from an unconscionable one,” Cuéllar wrote.

The case now goes back to the 9th circuit, and perhaps even back to trial in federal district court in San Francisco. That outcome seems to be what Jim Sturdevant, an attorney who represents the borrowers in the case, believes the likely course will be, probably sometime next year. He went on to call Monday’s opinion “a dramatic, full-throated victory” for consumers.

What It Means For California Lenders

While the implications for CashCall coming out of Monday’s court case are obvious, the ripples from the decision handed down by the high court this week could extend throughout the entire lending market. In 2017, state-licensed lenders in California made more than 350,000 consumer loans with interest rates of 100 percent or higher. For loans that are stretched over several years, that can mean customers end up paying several times what they originally borrowed over time.

Though the court ruled an interest rate could be high enough to be “unconscionable” under California law, they did not say exactly how high it had to be — other than that 100 percent isn’t high enough. Catherine Brennan, a partner at law firm Hudson Cook who represents consumer lenders, said that that is bound to cause a lot of confusion and uncertainty in the system.

“If you have APRs that are on the high side, you need to be looking at your program in California,” she said.

As lenders await an outcome for the CashCall case, Brennan said, some lenders may make like CashCall and scale back, or halt their lending while they await something that looks like a clear demarcation point.

“There’s no bright line,” she said. “That uncertainty is what’s going to tighten up credit in California.”

It is an argument that was made in several briefs from the industry, and by their representatives, about the case. Trade groups, like the Online Lenders Alliance and the California Financial Service Providers Association, said a ruling that rates can be unconscionably high would “disrupt the robust market for these loans” and require lenders “to scale back their credit offerings or exit the market.”

The bigger concern is that a finding against CashCall in its federal case could mean that scores of loans made over a decade may be ruled invalid — and lenders could find themselves buried in lawsuits.

“The possibility of litigation brought by each individual borrower long after the loan was made … will increase costs enormously,” the groups wrote.

What’s Next

CashCall offered no immediate response to the ruling, though the Online Lenders Alliance did note in a comment emailed to PYMNTS that the hope is for the ruling to help move the segment to greater clarity and independence.

“The California Supreme Court confirmed there is no bright line test for consumer lending interest rates, affirming that pricing for consumer loans should reflect consumer creditworthiness. We hope the lower court now takes the appropriate action to dismiss this case and stop lawsuits that seek to arbitrarily deny access to credit to millions of hardworking Californians,” Mary Jackson, CEO of the Online Lenders Alliance noted.

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