California law strictly limits interest rates on loans of less than $2,500, and sets no numerical ceiling on interest for higher loans. But rates on loans for $2,500 or more can nevertheless be so oppressive — or “unconscionable” — that they violate the law, the state Supreme Court ruled Monday.

In a class-action suit filed in San Francisco against the prolific lending company CashCall, the court ruled unanimously that state regulators, or judges, could intervene whenever interest rates are “unreasonably and unexpectedly harsh.” The court did not offer a numerical formula, and said enforcement should start with the state Department of Business Operations, formerly known as the Department of Corporations.

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Under a law that is meant to protect consumers, “courts have a responsibility to guard against consumer loan provisions with unduly oppressive terms,” Justice Mariano-Florentino Cuéllar said in the 7-0 ruling.
He said courts must proceed cautiously, considering not merely the terms of the loan but also how it was negotiated as well as its “commercial setting, purpose and effect.” Unsecured loans to high-risk borrowers “often justify high rates,” Cuéllar said, and past crackdowns on “payday loans” have not always worked to protect consumers.
But if a loan or group of loans is found to be oppressive, Cuéllar said, courts can roll back the interest rates and order the lenders to compensate the borrowers.