In a case that was defendant by Brendan Little at Lippes Mathias, a District Court judge in California has granted a defendant’s motion for summary judgment that it did not violate the Fair Debt Collection Practices Act and California state law by attempting to collect on a loan where the Annual Percentage Rate (APR) was more than 125%. The judge granted the motion while a motion for class certification was pending.
The background: The plaintiff took out a loan back in 2018 after filling out an application online. He was offered a $3,500 loan with an APR of 128.40%. There was no opportunity to negotiate the terms of the loan. After falling behind on payments, the balance was $5,671.62. The defendant purchased the charged-off loan in 2019 and later sued in state court to collect.
- In 2023, the plaintiff filed suit alleging that the interest rate was unconscionable, and therefore, any attempt to collect on the loan violated the FDCPA, California’s Rosenthal Fair Debt Collection Practices Act, and California’s Unfair Competition Law.
The ruling: Judge Dana M. Sabraw of the District Court for the Southern District of California concluded that while the loan carried a very high APR, it did not meet the legal threshold of unconscionability. The court applied the two-part test under California law: procedural unconscionability (oppression or surprise) and substantive unconscionability (harsh or one-sided terms).
- Judge Sabraw found a “minimal degree” of procedural unconscionability due to the non-negotiable nature of the loan, but little evidence of surprise. The APR was disclosed prominently at the start of the loan document, and the borrower had the opportunity to review it.
- On the substantive side, the court emphasized the context of the loan: it was unsecured, and the borrower had a low credit score, making him a high-risk borrower. “Unsecured loans made to high-risk borrowers often justify high rates,” the court wrote, quoting the California Supreme Court’s guidance that context, not just the number itself, determines unconscionability. The judge concluded that the 128.40% APR, while steep, was not so “unreasonably and unexpectedly harsh” as to “shock the conscience”.
- Because the loan terms were not found unconscionable, the plaintiff’s claims under both federal and state law failed, and the court entered judgment in favor of the defendant.
