The New Mexico Supreme Court’s June 26 decision in State of New Mexico v. B&B Investment Group Inc. is a case with potentially broader application than just the high-interest, predatory small-loan industry issues involved in the case.
The Attorney General Office’s consumer division brought the case against two small-loan companies – B&B and American Cash Loans LLC – for predatory lending and for charging interest rates exceeding 1,400 percent per year. The Supreme Court ruled against the small-loan companies and stated a new “common law” definition of unconscionable conduct warranting court relief.
Although New Mexico has no usury statute, the court supplied the basis for later courts to find interest charges “unreasonable” – a basis that may cause uncertainty for business in the future.
The facts of the B&B Investments case are extreme. In 2006, the two small-loan companies changed their business model from “payday” lending to high-interest signature loans. Shortly afterward, the New Mexico Legislature amended the Small Loan Act to control payday loans.
The two companies marketed signature loans to poor and unsophisticated borrowers – the “unbanked” as the Supreme Court termed them. The signature loans were for 12 months, from $50 to $300, payable biweekly and with annual percentage rates from 1,440 to 1,500 percent.
The court said the companies concealed the final interest rate from the borrowers. The attorney general charged that the loans were unconscionable under common law and the State Unfair Practices Act.
The trial court found that the loans were “procedurally” unconscionable and enjoined the companies from similar future activity. But it refused to find the loans “substantively” unconscionable, which was necessary for an award of damages.
The trial court ruled that it could not force the small-loan companies to pay back the unconscionable interest amounts because there was no statutory or reasonable interest on which to base the amount of overpayment.
Both sides appealed, and the Court of Appeals certified the case to the New Mexico Supreme Court.
The Supreme Court agreed the small loans at issue were procedurally unconscionable but ruled the small loans also were substantively unconscionable. The court said “(c)ontract provisions that unreasonably benefit one party over the other are substantively unconscionable” under common law, which may mean the court’s common law definition of “unconscionable” is less stringent than the statutory definitions in the Uniform Commercial Code and Unfair Trade Practices Act.
Those statutes require a showing that the victim utterly lacks sophistication or there is a gross disparity in value in the transaction. The court rejected defendants’ expert witnesses’ view that an 11,000 percent – or even an 11 million percent – interest rate would be acceptable in New Mexico because there is no usury statute.
The court said the New Mexico Money Act, which applies to unwritten contracts, with its 15 percent maximum interest, “contemplates that a reasonable interest rate would be 15 percent” as an interest rate for assessing damages. By accepting 15 percent interest as reasonable, the court was able to authorize restitution of excessive interest to the two companies’ signature loan customers.
Under the 2007 amendments to the Small Loan Act, the Legislature provided that payday loans were limited to 35 days, indefinite loan rollovers were prohibited and an interest rate cap of 400 percent was instituted. Thus, such loans are not covered by the B&B Investments case despite their statutorily permitted 400 percent interest rate.
Is any loan or contract providing for 15 percent interest subject to attack?
Probably not on rate alone.
What about the statement that contracts that “unreasonably benefit one party over the other” are unconscionable under common law?
Despite the Supreme Court’s loose definition of common law unconscionability, unconscionability probably still will require extreme facts.
Nonetheless, look for the case to be used by defendants in litigation not involving small loans, especially if the defendant appears unsophisticated. Hard cases make uncertain law.
Attorney Marshall G. Martin is in private practice in Albuquerque. He has experience in complex litigation, including securities, antitrust and lender liability law. He also has represented banks and private and public companies. He can be reached at 505-768-1500 or firstname.lastname@example.org.