Center Convinces Court to Publish Opinion Finding Arbitration Clause Unenforceable Against Consumers Charged Unconscionable Interest Rates For Auto Loans

February 11, 2021

The Center successfully sought publication of Maldonado v. Fast Auto Loans, a decision holding that a lender charging unconscionable interest rates could not force arbitration of a class action seeking an injunction providing broad-based protection against future harm to consumers. Enforcing an arbitration clause in these circumstances, the Fourth District Court of Appeal held, would require borrowers to waive all rights to public injunctive relief in violation of the rule stated in McGill v. Citibank, N.A., (2017) 2 Cal.5th 945. The decision very usefully explicates the law of arbitration and public injunctions in the context of predatory lending — an issue of particular importance during a pandemic with devastating financial consequences. 

The decision highlights two issues: the enforceability of arbitration clauses and predatory lending. Fast Auto Loans specialized in high-interest, short-term loans, many of which were secured by consumers’ cars, even though the lender knew that the value of the car would not cover the amount of the loan. The lender charged interest rates as high as 159% on loans ranging from just over $2500 to more than ten thousand dollars. Fast Auto Loans customers sued the company for charging unconscionable interest rates in violation of Financial Code sections 22302 and 22303, the Unfair Competition Law, and the Consumer Legal Remedies Act. The lender filed a motion to compel arbitration, which the trial court denied because it required borrowers to waive all public injunctive relief. The Court of Appeal affirmed the trial court’s ruling that the arbitration clause was unenforceable, finding that the McGill rule applied and the class waiver was not severable.

The opinion explained that the plaintiffs were seeking unwaivable public injunctive relief and therefore the McGill rule applied. The plaintiffs clearly were seeking to benefit not only themselves, but also all consumers and members of the public. Further, the opinion made clear that despite the lender’s argument to the contrary, the plaintiffs’ claims for public injunctive relief could not be limited only to false advertising claims. Instead, the UCL and CLRA must be broadly construed to include a wide variety of consumer protection claims under those statutes.

The opinion also clarified that the contract’s class action waiver was not severable by its own language. The class waiver provision contained a “poison pill”: if the class waiver were found unenforceable, then the arbitration provision would be null and void with respect to such proceedings, “subject to the right to appeal.” The lender argued that the “subject to the right to appeal” language meant that the court of appeal should review the class waiver provision before the trial court ruled on severability. The Court rejected that argument as “illogical,” and explained that the clause simply acknowledged the lenders’ right to appeal and enforce the class waiver if it were successful.

California has a strong interest in protecting consumers from predatory lending and in preserving consumers’ ability to hold companies accountable when they engage in harmful practices. While arbitration clauses have become ubiquitous in consumer contracts, California courts have recognized that companies cannot force their customers to waive public injunctive relief. That is, when an action seeks future protection of the public rather than just seeking redress for particular individuals, a private waiver cannot stand in the way.

This case therefore represents an important principle: that predatory lenders cannot prevent courts from hearing applications to protect the public from unlawful business practices. In recent years, predatory loans — including high-cost car title loans — have trapped many consumers in a cycle of borrowing that is difficult if not impossible to escape, devastating their finances in the meantime. 

The Center is grateful to its cosigners on this letter: Bet Tzedek Legal Services, Consumers for Auto Reliability and Safety (CARS), and Housing and Economic Rights Advocates.

The newly published decision underscores California courts’ commitment to ensuring that private ordering does not preclude public justice.