State Ex Rel. King v. B&B Investment Group, Inc.
2014 NMSC 024, 2014 NMSC 24, 6 N.M. 316 (2014)
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Rule of Law:
An extension of credit with an extremely high interest rate can be deemed substantively unconscionable under the Unfair Practices Act and common law, even in the absence of a statutory interest rate cap, if it results in a gross disparity between the value received and the price paid.
Facts:
- In January 2006, B&B Investment Group, Inc., and American Cash Loans, LLC (Defendants) began offering 'signature loans' of $50-$300.
- The loans were marketed primarily to low-income, financially unsophisticated individuals who were unbanked or underbanked.
- The loans carried Annual Percentage Rates (APRs) ranging from 1,147.14% to 1,500% over a one-year repayment term.
- Defendants transitioned from offering payday loans to these signature loans just before the New Mexico Legislature enacted reforms in 2007 to regulate payday lending.
- Defendants' business practices included misleadingly quoting the loan cost as a low daily rate, aggressively encouraging borrowers to refinance and increase their debt, and systematically withholding amortization schedules from customers.
- The withheld amortization schedules revealed that loans were often structured as interest-only for many months, meaning borrowers' payments did not reduce the principal balance for an extended period.
- Borrowers like Oscar Wellito took out a $100 loan and faced a total finance charge of $999.71.
- Borrower Henrietta Charley took out a $200 loan and faced a total finance charge of $2,160.04 to pay for groceries and gas.
Procedural Posture:
- The New Mexico Attorney General's Office (the State) sued B&B Investment Group, Inc., and American Cash Loans, LLC (Defendants) in state district court.
- The State alleged violations of the Unfair Practices Act (UPA) and common law unconscionability.
- Following a bench trial, the district court found Defendants' practices to be procedurally unconscionable and issued a permanent injunction.
- The district court, however, ruled that the loans were not substantively unconscionable, concluding that setting interest rate limits is a legislative function.
- The State appealed the district court's ruling on substantive unconscionability and its denial of restitution for borrowers.
- Defendants cross-appealed the finding of procedural unconscionability.
- The Court of Appeals certified the case to the Supreme Court of New Mexico for review.
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Issue:
Does an extension of credit with an annual percentage rate between 1,147.14% and 1,500% result in a gross disparity between the value received and the price paid, making it substantively unconscionable under the New Mexico Unfair Practices Act?
Opinions:
Majority - Chávez, Justice.
Yes, an extension of credit with an APR between 1,147.14% and 1,500% is substantively unconscionable. The court's inherent equitable power and the Unfair Practices Act (UPA) allow it to find a contract term unconscionable even without a specific statutory interest rate cap. The district court erred in applying a subjective theory of value; the UPA requires an objective assessment of the 'gross disparity between the value received by a person and the price paid.' Objectively, these signature loans are low-value products, offering a small principal amount ($50-$300) in exchange for an enormous amount of risk and historically exorbitant finance charges. The overall public policy of New Mexico, evidenced by the UPA, the Small Loan Act, and the UCC, is consumer-protective and does not permit such extreme interest rates, which are 'grossly unreasonable and against our public policy under the circumstances.'
Analysis:
This decision solidifies a court's authority to police against substantively unconscionable interest rates under common law and consumer protection statutes, even in a legislatively deregulated market without a specific usury cap. It establishes that the repeal of an interest rate ceiling does not grant lenders carte blanche to charge any rate, no matter how extreme. The case is significant for requiring an objective analysis of the value-price disparity in credit transactions, preventing lenders from justifying exorbitant rates by citing a borrower's desperation. This precedent provides a crucial judicial backstop against predatory lending practices and empowers state attorneys general to challenge loan products based on their fundamental fairness and public policy grounds.
