State Ex Rel. King v. B&B Investment Group, Inc.

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of this document
New Mexico Compilation
Commission, Santa Fe, NM
'00'04- 10:12:25 2014.07.28
IN THE SUPREME COURT OF THE STATE OF NEW MEXICO
Opinion Number: 2014-NMSC-024
Filing Date: June 26, 2014
Docket No. 34,266
STATE OF NEW MEXICO, ex rel.,
GARY K. KING, Attorney General,
Plaintiff-Appellant,
v.
B&B INVESTMENT GROUP, INC.,
d/b/a CASH LOANS NOW, and
AMERICAN CASH LOANS, LLC,
d/b/a AMERICAN CASH LOANS,
Defendants-Appellees.
CERTIFICATION FROM THE NEW MEXICO COURT OF APPEALS
Gary K. King, Attorney General
Karen J. Meyers, Assistant Attorney General
John D. Thompson, Assistant Attorney General
Santa Fe, NM
for Appellant
Modrall, Sperling, Roehl, Harris & Sisk, P.A.
Alex C. Walker
Albuquerque, NM
for Appellees
OPINION
CHÁVEZ, Justice.
{1} In January 2006, two former payday lenders, B&B Investment Group, Inc., and
American Cash Loans, LLC (Defendants), began to market and originate high-cost signature
loans of $50 to $300, primarily to less-educated and financially unsophisticated individuals,
1
obscuring from them the details of the cost of such loans. The loans were for twelve months,
payable biweekly, and carried annual percentage rates (APRs) ranging from 1,147.14 to
1,500 percent. The Attorney General’s Office (the State) sued Defendants, alleging that the
signature loan products were procedurally and substantively unconscionable under the
common law and that they violated the Unfair Practices Act (UPA), NMSA 1978, Sections
57-12-1 to -26 (1967, as amended through 2009).
{2} The district court found that Defendants’ marketing and loan origination procedures
were unconscionable and enjoined certain of its practices in the future, but declined to find
the high-cost loans substantively unconscionable, concluding that it is the Legislature’s
responsibility to determine limits on interest rates. Both parties appealed. We affirm the
district court’s finding of procedural unconscionability. However, we reverse the district
court’s refusal to find that the loans were substantively unconscionable because under the
UPA, courts have the responsibility to determine whether a contract results in a gross
disparity between the value received by a person and the price paid. We conclude that the
interest rates in this case are substantively unconscionable and violate the UPA.
I. BACKGROUND
{3} Defendants market, offer, and originate high-interest, small-principal loans that they
call “signature loans,” from retail storefronts in Albuquerque, Farmington, and Hobbs, New
Mexico. Signature loans are unsecured loans which require only the signature of the
borrower, along with verification of employment, home address, identity, and references.
Borrowers take out loans of $50 to $300 in principal, which are scheduled for repayment in
biweekly installments over a year. Signature loans carry APRs between 1,147.14 and 1,500
percent.
{4} Defendants are subprime lenders from Illinois who opened several payday lending
operations in New Mexico in the early 2000s because, according to company president
James Bartlett, “there was no usury cap” here. Before 2006, Defendants’ loan portfolios
were predominantly “payday loans” which, like signature loans, are small-principal, high-
interest loans. See Nathalie Martin, 1000% Interest—Good While Supplies Last: A Study of
Payday Loan Practices and Solutions, 52 Ariz. L. Rev. 563, 564 (2010). Payday loans differ
from signature loans primarily in the length of time they take to mature: payday loan terms
are between fourteen and thirty-five days, whereas Defendants’ signature loans are year-
long. Prior to 2007, when legislation was passed to limit payday lending, payday loans could
be rolled over indefinitely, which essentially turned them into medium- to long-term loans
that had the effect of keeping the borrower in debt for extended periods of time, similar to
the signature loans at issue here. See the 2007 amendments to the New Mexico Small Loan
Act of 1955 (Small Loan Act), NMSA 1978, §§ 58-15-31 to -39 (1955, as amended through
2007); see also Martin, supra, at 585-88 (discussing the similarities between signature loans
and payday loans).
{5} Defendants converted their loan products from payday to signature loans in Illinois
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in 2005, after the Illinois legislature enacted its Payday Loan Reform Act. 815 Ill. Comp.
Stat. 122/1-1, 1-5 (2005). Defendants also converted their loan products from payday to
signature loans in New Mexico just before the New Mexico Legislature implemented
extensive payday loan reforms in 2007. See § 58-15-32. Signature loan products are not
subject to the restrictions placed on payday loans by the 2007 amendments to the Small Loan
Act because they do not meet the definition of payday loans. Compare § 58-15-2(E)
(defining installment loan) with § 58-15-2(H) (defining payday loan). By 2008, Defendants
no longer marketed payday loans at their stores. Defendants admitted their signature loans
“definitely could be a substitute product” for payday loans.
{6} Defendants extend signature loans to the working poor; they lend exclusively to
people who provide proof of steady employment but who, by definition, are either unbanked
or underbanked. The Federal Deposit Insurance Corporation (FDIC) defines unbanked
households as those without a checking or savings account, and underbanked households as
those that have a checking or savings account but rely on alternative financial services.
Federal Deposit Insurance Corporation, 2011 FDIC National Survey of Unbanked and
Underbanked Households, Executive Summary at 3 n.2 (Sept. 2012),
http://www.fdic.gov/householdsurvey/. The State’s expert testified, and Defendants admit,
that signature loans are “alternative financial services.” All signature loan borrowers are at
least underbanked, and those borrowers without a checking or savings account are unbanked.
These borrowers are highly likely to live in poverty: in New Mexico, one-third of all
unbanked households and almost one-quarter of all underbanked households earn less than
$15,000 per year.1 Federal Deposit Insurance Corporation, supra, Detailed State and MSA
Tables, Appendices H-I, Table H-68, Household Banking Status by Demographic
Characteristics: New Mexico at 71. Borrowers’ testimony bears out the fact that Defendants
target the working poor.
{7} One borrower, Oscar Wellito, testified that he took out a signature loan from
Defendants after he went bankrupt. He was supporting school-aged children while trying to
service debt obligations with two other small loan companies. He earned about $9 an hour
at a Safeway grocery store, which was not enough money to make ends meet, yet too much
money to qualify for public assistance. “That’s why,” he testified, “I had no choice of getting
these loans, to feed my kids, to live from one paycheck to another paycheck.” He needed
money for groceries, gas, laundry soap, and “whatever we need to survive from one payday
to another payday.” Mr. Wellito borrowed $100 from Defendants. His loan carried a
1,147.14 APR and required repayment in twenty-six biweekly installments of $40.16 with
a final payment of $55.34. Thus, the $100 loan carried a total finance charge of $999.71.
{8} Another borrower, Henrietta Charley, took out a loan from Defendants for $200 that
1
In 2014, the federal poverty level for a family of four in the 48 contiguous states and
the District of Columbia was $23,850. Annual Update of the HHS Poverty Guidelines, 79
Fed. Reg. 3593-01, 3593 (Jan. 22, 2014).
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carried the same 1,147.14 APR as Mr. Wellito’s loan. Ms. Charley, a medical assistant and
mother of three, earned $10.71 per hour working thirty-two hours per week in the emergency
department of the San Juan Regional Medical Center. She earned around $615 in take home
pay every two weeks, while her monthly expenses, excluding food and gas, exceeded $1,000.
Ms. Charley’s ex-husband would only pay child support “every now and then,” and when
she did not receive that supplemental income, she would fall behind on her bills. She needed
a loan to buy groceries and gas. Defendants gave her a $200 signature loan with a total
finance charge of $2,160.04.
{9} After borrowers brought complaints to the Attorney General, the State sued
Defendants under the UPA, which prohibits “[u]nfair or deceptive trade practices and
unconscionable trade practices in the conduct of any trade or commerce.” Section 57-12-3.
Unconscionable trade practices are defined in relevant part as an “extension of credit . . . that
to a person’s detriment: (1) takes advantage of the lack of knowledge, ability, experience or
capacity of a person to a grossly unfair degree; or (2) results in a gross disparity between the
value received by a person and the price paid.” Section 57-12-2(E). The State identified
numerous business practices that it argued were procedurally unconscionable, and alleged
that the loan terms were substantively unconscionable. The State sought restitution, civil
penalties, and injunctive relief. The State also sued Defendants for violating New Mexico’s
common law of substantive and procedural unconscionability.
{10} The district court adjudicated liability in a four-day bench trial, and found that
Defendants had not violated Section 57-12-2(E)(2), but that they had violated Section 57-12-
2(E)(1).2 The district court correspondingly found that the loans were not substantively
unconscionable, but they were procedurally unconscionable under common law. The
evidence adduced at trial is discussed below.
{11} The State appealed, claiming the district court erred in three ways: first, by failing
to correctly interpret and apply Section 57-12-2(E)(2), reading the substantive
unconscionability prong in such a way that the section would become meaningless; second,
by failing to apply the common law doctrine of substantive unconscionability to the loans;
and third, by denying the State’s requested restitution. Defendants cross-appealed, claiming
the district court erred in determining that the loans violated Section 57-12-2(E)(1), and in
determining that the loans violated the common law of procedural unconscionability. The
Court of Appeals certified the case to this Court pursuant to NMSA 1978, Section 34-5-
14(C)(2) (1972). We accepted certification.
II. STANDARD OF REVIEW
{12} Because the litigation in this case involved a determination of whether a contract was
2
The district court misstated Section 57-12-2(E)(1) as Section 57-12-1(E)(1) in the
final paragraph of its decision.
4
unconscionable, we review de novo. “By both statute and case law, we review whether a
contract is unconscionable as a matter of law.” Cordova v. World Fin. Corp. of N.M., 2009-
NMSC-021, ¶ 11, 146 N.M. 256, 208 P.3d 901 (citing NMSA 1978, § 55-2-302 (1961)
(“providing that courts, as a matter of law, may police against contracts or clauses found
unconscionable”)); see also Fiser v. Dell Computer Corp., 2008-NMSC-046, ¶ 19, 144 N.M.
464, 188 P.3d 1215 (stating that unconscionability “is a matter of law and is reviewed de
novo.”). The district court’s factual findings are reviewed for substantial evidence. See
Landavazo v. Sanchez, 1990-NMSC-114, ¶ 7, 111 N.M. 137, 802 P.2d 1283 (“[The] court
views the evidence in the light most favorable to support the findings of the trial court.”).
“Substantial evidence is such relevant evidence that a reasonable mind would find adequate
to support a conclusion.” Id.
III. DISCUSSION
A. There was substantial evidence to support the district court’s judgment that
Defendants’ loans were procedurally unconscionable and violated Section 57-
12-2(E)(1)
{13} Section 57-12-2(E)(1) defines an unconscionable trade practice as any extension of
credit that “takes advantage of the lack of knowledge, ability, experience or capacity of a
person to a grossly unfair degree” and is detrimental to the borrower. Defendants challenge
the sufficiency of the evidence for the district court’s finding that they violated Section 57-
12-2(E)(1). To support the district court’s ruling, there must be substantial evidence that the
borrowers lacked knowledge, ability, experience, or capacity in credit consumption; that
Defendants took advantage of borrowers’ deficits in those areas; and that these practices
took advantage of borrowers to a grossly unfair degree to the borrowers’ detriment. Section
57-12-2(E). We conclude that substantial evidence supports the district court’s findings as
to each of these elements.
1. Evidence of borrowers’ lack of financial sophistication
{14} There was substantial evidence that the borrowers lacked knowledge, ability,
experience, or capacity in credit consumption. The district court heard from Defendants that
a “[s]ignature loan primarily is for someone that is an unbanked person [or] underbanked.”
As discussed above, all signature loan borrowers are by definition underbanked because they
are utilizing alternative financial services. Ms. Charley is an example of an underbanked
borrower because although she had access to a bank account, she only used it to receive
child support payments. A subset of Defendants’ borrowers are unbanked, like Mr. Wellito,
who testified he never had a bank account because he could not afford to open one. The
district court heard evidence about demographic characteristics of unbanked and
underbanked New Mexicans, as well as their behavioral and cognitive biases, which were
borne out by borrower testimony. We will discuss each piece of demographic and cognitive
evidence in turn.
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{15} Demographically, unbanked and underbanked New Mexicans have significantly less
education than the general population, are disproportionately living in poverty, and are more
likely to be people of color. See generally Federal Deposit Insurance Corporation, National
Survey of Unbanked and Underbanked Households (Dec. 2009). Their education levels are
lower: the State presented evidence that in over 25 percent of unbanked and underbanked
households, no one holds a high school degree, and in only a handful of unbanked
households—just over 9 percent—does anyone have any college education at all. Federal
Deposit Insurance Corporation, supra, Appendix B, Detailed State Tables, Table B-33,
Banking Status by Household Characteristics: New Mexico at 102. They are more likely to
be poor: 27.9 percent of unbanked households and 24.2 percent of underbanked households
in New Mexico lived on less than $15,000 per year in 2009. Id. Over 50 percent of
underbanked households live on less than $30,000 per year. Id. They are also more likely to
belong to an ethnic minority: 41.6 percent of Hispanic households are unbanked or
underbanked, and 58.3 percent of “other” households (defined as non-Hispanic, non-black,
and non-white, which is a category that includes Native Americans) are unbanked or
underbanked. Id.
{16} Behaviorally and cognitively, unbanked and underbanked New Mexicans exhibit
heuristic biases that work to their detriment. The State’s expert, Professor Christopher
Peterson,3 testified that these borrowers exhibit certain cognitive biases that lead them to
make decisions that are contrary to their interests. They exhibit unrealistic optimism, or
fundamental attribution error, meaning that they overestimate their ability to control future
circumstances and underestimate their exposure to risk. Thus, these borrowers have
unrealistic expectations about their ability to repay these loans. They also exhibit intemporal
biases, meaning they tend to focus on short-term gains, while discounting future losses they
might suffer. Thus, borrowers focus on the promise of quick cash, and fail to make more
considered judgments about the long-term costs of the loan. They also are subject to
“framing” and “anchoring” effects, meaning that the way the price of a loan is framed at the
outset may distort the prospective borrower’s perception of the cost, and the borrower will
retain that initial perception. If the cost initially is framed as being very low, such as $1.50
per day, a borrower will “anchor” his or her expectations on that claim and have difficulty
reassessing the true costs once more information becomes available. Finally, borrowers are
subject to information overload, meaning that when they are presented with a technically
complex loan agreement, they cease trying to understand the terms at all because they realize
they will not be able to understand all of the pricing features.
{17} These cognitive biases were confirmed in a New Mexico-specific study of borrower
perceptions at the point of sale in the high-cost lending environment, which Professor
Peterson relied on to formulate his opinion. See Martin, supra, 52 Ariz. L. Rev. at 596-613.
3
Professor Peterson is a law professor and associate dean at the University of Utah
whose area of research is consumer finance with a particular focus on high-cost, small-
principal loans.
6
In that study of 109 borrowers, Professor Martin found that 75 percent of borrowers could
not identify the APR of their small-principal, high-interest loan at the point of sale, or
mistakenly believed that the interest rate was between one and 100 percent. Id. at 600-01.
Additionally, borrowers could not reliably distinguish whether their loans were payday or
installment loans, suggesting that the labels—as far as borrowers were concerned—are a
distinction without a difference. Id. at 586 n.123.
{18} Moreover, these cognitive biases were consistent with borrower testimony. Mr.
Wellito and Ms. Charley testified that they thought they would be able to pay off their loans
early, which is consistent with the unrealistic optimism bias described by Professor Peterson.
Evidence of intemporal bias was shown by Mr. Wellito’s testimony that he took out the loan
because Defendants’ advertisements made it “look[] so easy,” like “the money’s there and
. . . [y]ou just walk in and you just get it . . . [and] you pay it all off.” Ms. Charley also
testified that she took out the signature loan because it looked like an “easy” way out of her
financial distress. The theory of framing and anchoring effects and information overload was
consistent with statements from borrowers who testified that they focused on the biweekly
payment amount and did not consider the long-term costs of the loan. Borrowers also
testified that loan origination at Defendants’ stores took about 10 minutes and was a hurried
“sign here, sign there” process, which is further evidence that the borrowers may have been
subject to information overload at the time of loan origination.
{19} Beyond cognitive biases, borrowers’ simple lack of knowledge, experience, ability,
or capacity in credit transactions was evident from their testimony. Mr. Wellito, who had
never had a bank account in his life, could not accurately describe how interest is calculated,
stating that interest is “when you borrow money . . . you pay a little bit more to have them
lend you the money.” He did not know that interest is quoted in terms of a percentage, and
did not understand that it is better for the buyer if the number is lower. Ms. Charley had not
taken out a small loan before and did not understand that her loan would require sixteen
interest-only payments. Another borrower, Rose Atcitty, understood only the amount she
would have to pay and the date she would have to start repayment when she took out her
signature loan; she was not told about the interest rate or the finance charge, and did not
understand that it was a year-long loan. This testimony shows that these were not
sophisticated borrowers, but borrowers who lacked knowledge of basic consumer finance
concepts and had little experience in banking and credit markets.
2. Evidence of Defendants’ exploitation of borrowers’ disadvantage
{20} There was substantial evidence that Defendants took advantage of borrowers’
deficits. Defendants directed their employees to describe the loan cost in terms of a
misleading daily rate. Employees were instructed to tell customers that interest rates are
typically “between $1.00 and $1.50 per day, per one hundred you borrow.” Defendants
admitted that this was a factually inaccurate rate. At $1 per day, the finance charge for one
year would be $365, and at $1.50 per day, the finance charge would be $547.50, but
Defendants knew that the actual finance charge for one year would be at least $1,000.
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Defendants would also advertise that they were selling loans at 50 percent off, when in fact
the only thing that was 50 percent off was the interest on the first installment payment on the
loan.
{21} Defendants aggressively pursued borrowers to get them to increase the principal of
their loans. “Maximize Every Customer’s Principle [sic] Balance” and “maximize every
opportunity that presents itself” was the mandate. Defendants directed employees to take
time every day to give every customer a “courtesy call[]” to “make them aware of the
possibility of rewriting their loan if there is availability on their account.” Employees were
also directed to “CALL[] ACTIVE FILES TO INCREASE PRINCIPAL” with the objective
of “increas[ing the] principal amount borrowed to build store.” The script for the courtesy
calls was as follows:
Your account balance as of today is $_______, and your credit available is
$_____. Renewing your loan with us today Mr./Mrs.______ would put an
extra $____ in your pocket which I’m sure would come in handy with back
to school, last minute vacations or anything else that comes up towards the
end of Summer. Would you like me to get things ready for you to come in
today and take care of this?
At least one store employee described a practice of calling customers who were one payment
away from paying off their loans to encourage them to take out another loan.
{22} Defendants also instructed their employees to withhold amortization schedules from
customers. The store manual instructed, “PRINT OUT THE AMORTIZATION
SCHEDULE FOR THE FILE, BUT NEVER GIVE ONE TO A CUSTOMER!” Mr. Bartlett
claimed that this entire instruction was a “misprint” in the 2007 store manual, and explained
that the reason he had included it again in the 2010 version is that it was an instruction he
had “overlooked when revising” the manual. He stated that although “that is exactly what
[the store manual] says,” Defendants actually train their employees to give out amortization
schedules “to everybody.” Borrowers, however, testified that they had not received
amortization schedules. The district court did not credit Mr. Bartlett’s testimony, finding
instead that Defendants have a practice of withholding the schedules.
{23} Amortization schedules revealed the signature loans were interest-only loans for
extended periods of time. For example, the amortization schedule in Ms. Charley’s file
showed that she would have to make sixteen biweekly payments of $90.68 each before any
of her payments would be allocated toward her principal. According to her amortization
schedule, on the seventeenth biweekly payment, she would finally pay off the first $1.56
toward her principal. Thus, Ms. Charley would have to make timely payments totaling
$1,541.56 over thirty-four weeks (seventeen biweekly payments) before her loan balance
would fall below the principal she borrowed. Defendants did not explain this to Ms. Charley,
nor did they give her a copy of the amortization schedule.
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{24} All of these practices were mandated by Defendants’ own confidential employee
manuals, demonstrating that they were systematic company policies, as opposed to isolated
incidents. These practices were confirmed by the testimony of both store employees and
borrowers.
3. Evidence of gross unfairness and detriment
{25} There was substantial evidence that Defendants’ practices took advantage of
borrowers to a grossly unfair degree. We consider whether borrowers were taken advantage
of to a grossly unfair degree by looking at practices in the aggregate, as well as the
borrowers’ characteristics. Portales Nat’l Bank v. Ribble, 2003-NMCA-093, ¶ 15, 134 N.M.
238, 75 P.3d 838. In Ribble, the Court of Appeals considered a bank’s pattern of conduct and
demographic factors of the borrowers in determining whether the bank had violated Section
57-12-2(E)(1) in foreclosing on an elderly couple’s ranch:
[T]he pattern of conduct by the Bank . . . when considered in the aggregate,
constitutes unconscionable trade practices [under] Section 57-12-2(E).
Though the individual acts may be legal, it is reasonable to infer that the
Bank took advantage of the Ribbles to a “grossly unfair degree” because of
(1) the Ribbles’ advancing age, (2) their clear inability to handle their
accounts, and (3) their long-term dealings with the Bank that could have
justified their belief that the Bank had sufficient collateral in their property.
Ribble, 2003-NMCA-093, ¶ 15. Similarly, the pattern of conduct by Defendants in this case
shows they were leveraging the borrowers’ cognitive and behavioral weaknesses to
Defendants’ advantage, and that the borrowers were clearly among the most financially
distressed people in New Mexico. This evidence supported a reasonable inference that
Defendants were taking advantage of borrowers to a “grossly unfair degree.”
{26} Defendants argue that the State failed to prove detriment because it “offered no
evidence as to whether the individual borrower thought the loan transaction worked to his
or her detriment.” The UPA does not require a subjective, individualized showing of
detriment. See § 57-12-4 (stating that the UPA is to be construed in line with Federal Trade
Commission (FTC) interpretations and federal court decisions); see also Fed. Trade Comm’n
v. Sec. Rare Coin & Bullion Corp., 931 F.2d 1312, 1316 (8th Cir. 1991) (rejecting
individualized proof of detriment and stating “[i]t would be virtually impossible for the FTC
to offer such proof, and to require it would thwart and frustrate the public purposes of FTC
action. This is . . . a government action brought to deter unfair and deceptive trade practices
and obtain restitution on behalf of a large class . . . . It would be inconsistent with the
statutory purpose for the court to require proof of subjective reliance by each individual
consumer.”); Fed. Trade Comm’n v. Kitco of Nev., Inc., 612 F. Supp. 1282, 1293 (D. Minn.
1985) (“Requiring proof of subjective reliance by each individual consumer would thwart
effective prosecution of large consumer redress actions and frustrate the statutory goals of
the [FTC Act].”). We may presume detriment from the evidence that Defendants’ corporate
9
practices took unfair advantage of borrowers’ disadvantages to a gross degree. See Fed.
Trade Comm’n v. Nat’l Bus. Consultants, Inc., 781 F. Supp. 1136, 1141 (E.D. La. 1991)
(“[T]he FTC does not need to prove individual reliance on defendants’ material
representations and omissions; rather, the proper standard to establish reliance in an FTC
action, as here, is based on a pattern or practice of deceptive behavior.”). Thus, there was
sufficient evidence of detriment to the borrowers, and substantial evidence supported the
district court’s ruling that Defendants violated Section 57-12-2(E)(1).
{27} For the same reasons, there was also substantial evidence supporting the finding of
procedural unconscionability as understood in common law. Procedural unconscionability
may be found where there was inequality in the contract formation. Cordova, 2009-NMSC-
021, ¶ 23. Analyzing procedural unconscionability requires the court to look beyond the four
corners of the contract and examine factors “including the relative bargaining strength,
sophistication of the parties, and the extent to which either party felt free to accept or decline
terms demanded by the other.” Id. As discussed at length above, the relative bargaining
strength and sophistication of the parties is unequal. Moreover, borrowers are presented with
Hobson’s choice: either accept the quadruple-digit interest rates, or walk away from the loan.
The substantive terms are preprinted on a standard form, which is entirely nonnegotiable.
The interest rates are set by drop-down menus in a computer program that precludes any
modification of the offered rate. Employees are forbidden from manually overriding the
computer to make fee adjustments without written permission from the companies’ owners:
manual overrides “will be considered in violation of company policy and could result with
. . . criminal charges brought against the employee and or termination.” Because these
contracts are prepared entirely by Defendants, who have superior bargaining power, and are
offered to the weaker party on a take-it-or-leave-it basis, Defendants’ loans are contracts of
adhesion. See Fiser, 2008-NMSC-046, ¶ 22 (discussing the factors that create an adhesive
contract). “Adhesion contracts generally warrant heightened judicial scrutiny because the
drafting party is in a superior bargaining position,” Rivera v. Am. Gen. Fin. Servs., Inc.,
2011-NMSC-033, ¶ 44, 150 N.M. 398, 259 P.3d 803, and although they will not be found
unconscionable in every case, “an adhesion contract is procedurally unconscionable and
unenforceable when the terms are patently unfair to the weaker party.” Id. (internal quotation
marks and citation omitted). Under these circumstances, there is substantial evidence that
Defendants’ loans are procedurally unconscionable under common law.
B. The district court’s permanent injunction is an appropriate remedy
{28} The UPA grants the State the right to seek restitution, civil penalties, and injunctive
relief for unfair trade practices. Section 57-12-8(B) (empowering the Attorney General to
“petition the district court for temporary or permanent injunctive relief and restitution”); §
57-12-11 (allowing the Attorney General to recover a civil penalty of up to $5,000 per
willful violation). The district court granted the State a permanent injunction. “An injunction
is an equitable remedy.” Cafeteria Operators, L.P. v. Coronado-Santa Fe Assocs., L.P.,
1998-NMCA-005, ¶ 19, 124 N.M. 440, 952 P.2d 435. “The application of equitable
doctrines and the granting of equitable relief rests in the sound discretion of the district
10
court.” Moody v. Stribling, 1999-NMCA-094, ¶ 30, 127 N.M. 630, 985 P.2d 1210. The grant
or denial of equitable remedies is reviewed for abuse of discretion. Nearburg v. Yates
Petroleum Corp., 1997-NMCA-069, ¶ 9, 123 N.M. 526, 943 P.2d 560. “Such discretion is
not a mental discretion to be exercised as one pleases, but is a legal discretion to be exercised
in conformity with the law.” Cont’l Potash, Inc. v. Freeport-McMoran, Inc., 1993-NMSC-
039, ¶ 26, 115 N.M. 690, 858 P.2d 66, holding limited on other grounds by Davis v. Devon
Energy Corp., 2009-NMSC-048, ¶¶ 34-35, 147 N.M. 157, 218 P.3d 75. “An abuse of
discretion will be found when the trial court’s decision is clearly untenable or contrary to
logic and reason.” Id. (internal quotation marks and citation omitted).
{29} The district court permanently prohibited Defendants from (1) targeting borrowers
to try to increase the amount of their principal debt obligation until the borrower’s file had
become inactive for at least sixty days; (2) quoting the cost of signature loans “in terms of
a daily or other nominal amount . . . or in any other amount than that which is mandated by
the federal Truth in Lending Act,” in advertising materials or during loan origination; (3)
engaging in any practice that focuses the borrower’s attention on the loan’s installment
payment obligation “without also clearly, conspicuously, and fully disclosing and explaining
the cost of the loan if repaid over the course of the full repayment term”; and (4) representing
that the loans will be in any way “easy” to repay. The district court also ordered Defendants
to (1) provide all borrowers with a copy of the amortization schedule; (2) provide
information regarding a substantive legal defense and contact information for the Attorney
General’s Office when communicating with a borrower in connection with debt collection;
and (3) revise employee manuals to reflect these changes.
{30} Because there was substantial evidence supporting the district court’s findings that
Defendants’ lending practices were procedurally unconscionable, the district court had the
authority to grant this injunctive relief pursuant to Section 57-12-8(B). The injunction
attempts to remedy Defendants’ procedurally unconscionable practices and is narrowly
tailored to address each practice. We see nothing improper about the injunction.
C. The loans were substantively unconscionable under common law and the UPA
{31} The district court concluded that it was precluded from ruling on substantive
unconscionability absent an express statutory prohibition of the interest rates at issue, and
without considering the evidence on each individual loan issued by Defendants. We disagree
with both conclusions.
{32} “Unconscionability is an equitable doctrine, rooted in public policy, which allows
courts to render unenforceable an agreement that is unreasonably favorable to one party
while precluding a meaningful choice of the other party.” Cordova, 2009-NMSC-021, ¶ 21.
Substantive unconscionability is found where the contract terms themselves are “illegal,
contrary to public policy, or grossly unfair.” Id. ¶ 22 (quoting Fiser, 2008-NMSC-046, ¶ 20).
In determining whether a contract term is substantively unconscionable, courts examine
“whether the contract terms are commercially reasonable and fair, the purpose and effect of
11
the terms, the one-sidedness of the terms, and other similar public policy concerns.” Id.
“Contract provisions that unreasonably benefit one party over another are substantively
unconscionable.” Id. ¶ 25. Thus, substantive unconscionability can be found by examining
the contract terms on their face—a simple task when, as here, all substantive contract terms
were nonnegotiable, and embedded in identical boilerplate language. See id. ¶ 22. The test
for substantive unconscionability as outlined in Cordova simply asks whether the contract
term “is grossly unreasonable and against our public policy under the circumstances.” Id. ¶
31. We hold it is grossly unreasonable and against public policy to offer installment loans
at 1,147.14 to 1,500 percent interest for the following reasons.
{33} Courts are not prohibited from deciding whether a contract is grossly unreasonable
or against public policy simply because there is not a statute that specifically limits contract
terms. In a landmark case on substantive unconscionability, Williams v. Walker-Thomas
Furniture Co., the District of Columbia Circuit Court reversed the District of Columbia
Court of Appeals on precisely this issue. 350 F.2d 445, 448 (D.C. Cir. 1965). In that case,
the court of appeals had determined that, although it “[could not] condemn too strongly
appellee’s conduct” in selling a woman a $514 stereo set “with full knowledge that appellant
had to feed, clothe and support both herself and seven children” on a $218 monthly income,
it would not find the contract unconscionable because it found no caselaw or legislation that
would support a declaration that the contract at issue was contrary to public policy. Id. The
circuit court reversed, stating “[w]e do not agree that the court lacked the power to refuse
enforcement [of] contracts found to be unconscionable.” Id. Even in the absence of binding
precedent or statutory power, the circuit court held that “the notion that an unconscionable
bargain should not be given full enforcement is by no means novel.” Id. We agree with the
reasoning of Williams. Ruling on substantive unconscionability is an inherent equitable
power of the court, and does not require prior legislative action. “Equity supplements the
common law; its rules do not contradict the common law; rather, they aim at securing
substantial justice when the strict rule of common law might work hardship.” Larry A.
DiMatteo, The History of Natural Law Theory: Transforming Embedded Influences into a
Fuller Understanding of Modern Contract Law, 60 U. Pitt. L. Rev. 839, 890 (1999) (internal
quotation marks and citation omitted). Although there is not a specific statute specifying a
limit on acceptable interest rates for the types of signature loans in this case, in addition to
our caselaw addressing unconscionability, the Legislature has empowered courts to
adjudicate cases involving claims of unconscionable trade practices under the UPA.
{34} In determining the public policy behind the UPA, we must first examine the statute’s
plain language. The statute expressly prohibits extensions of credit that take advantage of
borrowers’ weaknesses “to a grossly unfair degree” or that result in “a gross disparity”
between the value and the price. Section 57-12-2(E). The UPA is a law that prohibits the
economic exploitation of others. The language of the UPA evinces a legislative recognition
that, under certain conditions, the market is truly not free, leaving it for courts to determine
when the market is not free, and empowering courts to stop and preclude those who prey on
the desperation of others from being rewarded with windfall profits.
12
{35} The district court determined that the signature loans do not result in a gross disparity
between the value and the price because borrowers could pay off the loans early, and they
“obtained a value beyond the face value, or even the time value, of the money
borrowed—the ability to buy groceries for [their] children now, the ability to buy gas to get
to a new job, [and] the ability to pay off a cell phone.” In adopting this view, the district
court was following a subjective theory of value, under which the more desperate a person
is for money, the more “value” that person receives from a loan. Thus, hypothetically a high-
cost loan could violate the statute if a person borrows money for betting on blackjack,
because the “value” that person receives would be low compared to the price of the loan,
whereas the same high-cost loan sold to a single mother who needs to feed her children
could not violate the statute, because the “value” that mother receives would be high
compared to the price of the loan. Under that erroneous reading of the statute, consumer
exploitation would be legal in direct proportion to the extent of the consumer’s desperation:
the poorer the person, the more acceptable the exploitation. Such a result cannot be
consonant with the consumer-protective legislative intent behind the UPA. It is not the use
to which the loan is put that makes its value low or high, but the terms of the loan itself.
{36} Under an objective, not a subjective, reading of the UPA, Defendants’ signature loans
are low-value products. First, these loans are extremely expensive. The least expensive
signature loan carries a 1,147.14 APR, meaning a loan of $100 carries a finance charge of
$999.71. Second, Defendants do not report positive repayments to credit reporting agencies.
Thus, borrowers who succeed in bearing the exorbitant costs associated with these loans and
who make good-faith efforts to repay them can never improve their credit scores. Borrowers
who fail to pay, however, can have their credit scores negatively impacted. They can be sued
and have their wages garnished. They will also be liable for Defendants’ costs of collecting
on the debt, including attorney fees. Third, there is a $25 bounced check or automatic
clearinghouse fee that can be added to the cost of the loan each time a check is returned for
insufficient funds, and there is a 5 percent penalty fee for each late payment, each of which
potentially increase the cost of these loans. Fourth, there is an acceleration-upon-default
clause which provides that if a borrower falls behind on his or her payments over the year,
then the full amount of the debt—principal and interest–comes due immediately. All of these
loan features, in combination with the quadruple-digit interest rates, make it a low-value
product regardless of how the borrower uses the principal. Defendants point out that people
who take out mortgages will, like borrowers here, pay several times the principal in interest
payments over the life of their loan. However, unlike a mortgage loan, borrowers are not
gaining an asset when taking out a signature loan; rather, they are taking on liability. The
value the borrower receives from a signature loan consists of a small amount of
principal—never more than $300—and an enormous amount of risk. Therefore, these loans
are objectively low-value products and are grossly disproportionate to their price.
{37} Defendants further contend it is not the public policy of this state to prohibit usurious
interest rates because the Legislature removed the interest rate cap in 1981. In this argument
lies the implicit assertion that by removing the interest rate cap, the Legislature was stating
that there is no interest rate that would violate public policy. Indeed, Defendants’ expert
13
testified that interest rates of 11,000 percent or even 11,000,000 percent would be acceptable
under our statutory scheme.4 If we were to accept Defendants’ argument, we would have to
hold that the doctrine of unconscionability as it exists at common law and in the UPA does
not apply to the extension of credit. We decline to do so because to do so would thwart New
Mexico public policy as expressed in the UPA and other legislation.
{38} Public policy is not set by a single statute, or the repeal of a single statute. Instead,
we look to “other statutes in pari materia under the presumption that the legislature acted
with full knowledge of relevant statutory and common law . . . [and] did not intend to enact
a law inconsistent with existing law.” State ex rel. Quintana v. Schnedar, 1993-NMSC-033,
¶ 4, 115 N.M. 573, 855 P.2d 562. We also look to the common law and to equity in
determining public policy.
{39} Other relevant statutes include the Small Loan Act, Sections 58-15-31 to -39, which
regulates the small loan industry; the unconscionability clause of the Uniform Commercial
Code (UCC), Section 55-2-302; and the Money, Interest and Usury Act (Money Act),
NMSA 1978, Sections 56-8-1 to -21 (1851, as amended through 2004), which sets a default
interest rate of 15 percent for contracts where no interest rate is stated. Section 56-8-3.
Because these statutes were enacted prior to the UPA, we can infer that the Legislature
enacted the UPA with full knowledge of and in harmony with the public policy expressed
by those statutes. See Schnedar, 1993-NMSC-033, ¶ 4 (holding that similar statutes “should
be harmonized and construed together when possible, in a way that facilitates their operation
and the achievement of their goals.” (internal citation omitted)).
{40} The Legislature enacted the Small Loan Act in 1955 to, among other factors, “insure
more rigid public regulation and supervision of those engaging in the business of making
small loans, and . . . to facilitate the elimination of abuse of borrowers.” Section 58-15-1(D).
The Legislature was concerned with the exploitation of borrowers, declaring “experience has
proven . . . that without regulations, borrowers of small sums are often exploited by charges
generally exorbitant in relation to those necessary to conduct a small loan business.” Section
58-15-1(C). This statutory language about exploitation and abuse evinces a consumer-
protective public policy goal. At the time the Small Loan Act was enacted, New Mexico had
an interest rate cap of 12 percent for unsecured debts such as small installment loans, which
Defendants now offer at between 1,147.14 and 1,500 percent interest. NMSA 1978, § 56-8-
11 (1957), repealed by 1981 N.M. Laws, ch. 263, § 4 (July 1, 1981).
{41} The UCC also addresses substantive unconscionability. The New Mexico Legislature
4
In an example of the unlimited nature of this argument, Defendants’ expert,
Professor Thomas Lehman, also posited that it would be acceptable for a borrower to agree
to harvest a kidney in exchange for $100. However, he stopped short of endorsing freedom
to contract for one’s own involuntary servitude, stating that although one could enter such
a contract, one could “break that bond at any time they want.”
14
adopted the UCC’s unconscionability doctrine in 1961, which codifies the courts’ broad
remedial power to refuse to enforce an unconscionable contract, strike the offending clause,
or limit the application of the offending clause to avoid an unconscionable result. Section
55-2-302. The official comment to Section 55-2-302 directly discusses legislative intent:
“This section is intended to make it possible for the courts to police explicitly against the
contracts or clauses which they find to be unconscionable.” Id. cmt. 1. It goes on to state:
This section is intended to allow the court to pass directly on the
unconscionability of the contract or particular clause therein and to make a
conclusion of law as to its unconscionability. The basic test is whether, in the
light of the general commercial background and the commercial needs of the
particular trade or case, the clauses involved are so one-sided as to be
unconscionable under the circumstances existing at the time of the making
of the contract. . . . The principle is one of the prevention of oppression and
unfair surprise.
Id. (emphasis added). Although Section 55-2-302 pertains to the sale of goods, it was
enacted prior to the UPA sections dealing with unconscionability.5 Therefore, we can infer
that when it enacted the unconscionability clause of the UPA, the Legislature intended to
allow the courts the same flexibility in determining whether a contract extending credit is
unconscionable.
{42} The Money Act also evinces a legislative intent to establish a consumer-protective
public policy. Although the Legislature abolished the interest rate cap in 1981, Defendants’
argument that in so doing the Legislature intended to permit any interest rate is without
merit. The Money Act sets the default interest rate at 15 percent for contracts that do not
specify an interest rate. See § 56-8-3 (“The rate of interest, in the absence of a written
contract fixing a different rate, shall be not more than fifteen percent . . . .”). Thus, when the
Legislature repealed the absolute cap of 12 percent interest for unsecured debts but left the
default rate in place, it contemplated that a reasonable interest rate would be 15 percent. The
Money Act sets the default interest rate for court judgments at 8.75 percent, unless the
judgment is based on tortious conduct or bad faith, for which the default interest rate is 15
percent. Section 56-8-4(A)(2). Fifteen percent interest was the high end of the Legislature’s
contemplation. Additionally, the Money Act still prohibits excessive charges. Section 56-8-
9(A) (“[N]o person, corporation or association, directly or indirectly, shall take, reserve,
receive or charge any interest . . . or other advantage for the loan of money or credit . . .
except at the rates permitted in Sections 56-8-1 through 56-98-21 NMSA 1978.”). Lenders
who violate the Money Act are required to disgorge all profits from the usury, not offset by
5
The UCC provision on unconscionability, Section 55-2-302, was enacted by 1961
New Mexico Laws, Chapter 96, Section 2-302, six years prior to the enactment of UPA
Sections 57-12-2 (defining unconscionable trade practices) and 57-12-3 (prohibiting
unconscionable trade practices).
15
their operating costs. See § 56-8-13 (imposing a penalty of forfeiture of the entire amount
of interest for “[t]he taking, receiving, reserving or charging of a rate of interest greater than
allowed by this act”).
{43} In 2007, the Legislature amended the Small Loan Act to try to address the payday
loan crisis in New Mexico. See §§ 58-15-31 to -39; see also Martin, supra, 52 Ariz. L. Rev.
at 577-87 (discussing the legislative history of payday loan regulation in New Mexico). The
amendments cap the effective interest rate on payday loans at about 400 percent by limiting
fees and interest on payday loans to $15.50 per $100 borrowed, plus an additional $0.50 per
loan for fees charged by the consumer-information database provider. Section 58-15-33(B),
(C). Payday lenders are required to take into account the borrower’s financial position, and
they cannot extend loans exceeding 25 percent of the borrower’s gross monthly income.
Section 58-15-32(A). However, the effective fee cap and other consumer protections built
into the Small Loan Act only apply to payday loans, defined as loans with a duration of
fourteen to thirty-five days, for which the consumer receives the loan principal and in
exchange gives the lender a personal check or debit authorization for the amount of the loan
plus interest and fees. Section 58-15-2(H).
{44} Defendants could not lawfully charge 1,147.14 APR on a year-long loan under the
payday loan provisions of the Small Loan Act. Defendants were payday lenders until 2006,
the year before the New Mexico Legislature enacted these statutory limitations on payday
lending. Defendants admit that they substituted signature loans for payday loans in Illinois
when the Illinois legislature began to regulate payday lending. In addition, Defendants admit
that their signature loans could be considered substitute products for payday loans in New
Mexico. The reasonable inference is that Defendants’ signature loan products were
specifically designed to make an end run around the consumer protections of the Small Loan
Act, which the Legislature tried to prevent by stating that “licensee[s] shall not . . . use a
device or agreement that would have the effect of charging or collecting more fees, charges
or interest than that allowed by law by entering into a different type of transaction with the
consumer that has that effect.” Section 58-15-34(D). Their success in evading application
of the Small Loan Act does not immunize Defendants from other laws that prohibit
unconscionable loan practices.
{45} The Legislature did not repeal all statutes protecting consumers from usurious
practices: far from it, the Legislature empowered the Attorney General and private citizens
to fight unconscionable practices through the UPA; it ratified the court’s inherent equitable
power to invalidate a contract on unconscionability grounds under the UCC; it maintained
a prohibition on excessive charges and set a reasonable default interest rate of 15 percent
under the Money Act; and it set a de facto interest rate cap on substantively identical types
of loans with the 2007 amendments to the Small Loan Act. Contrary to Defendants’
contention that the repeal of the interest rate cap demonstrates a public policy in favor of
unlimited interest rates, the statutes when viewed as a whole demonstrate a public policy that
is consumer-protective and anti-usurious as it always has been. A contrary public policy that
permitted excessive charges, usurious interest rates, or exploitation of naive borrowers
16
would be inequitable, particularly in New Mexico where a greater percentage of people are
struggling in poverty, and where more households are unbanked and underbanked than
almost anywhere in the nation.6 Professor Peterson testified that “Defendants’ signature loan
product is among the most expensive loan products offered in the recorded history of human
civilization.” For comparison, interest rates that were considered high in the mid-twentieth
century—rates used for high-risk borrowers on unsecured loans—were between 18 and 42
percent. Mafia loan sharks in New York City at the height of mafia power charged 250
percent interest. It is contrary to our public policy, and therefore unconscionable as a matter
of law, for these historically anomalous interest rates to be charged in our state. We next
address the appropriate remedy or remedies for the substantively unconscionable loans.
D. Restitution is the appropriate remedy for the procedural and substantive
unconscionability of the signature loans in this case
{46} During the remedies phase of trial, the State requested that the district court
invalidate all of the loans as the fruit of unconscionable lending practices and return the
parties to their precontract status. Thus, the State sought restitution in the form of a full
refund for borrowers of all money paid in excess of the principal on their loans. The district
court denied restitution by any measure, reasoning that: (1) complete avoidance of the loans
was improper because it would result in borrowers paying no interest; (2) the State’s
proposed remedy ignored the subjective value borrowers received, and would be a windfall
to borrowers; (3) any refunds to borrowers would have to be offset by the subjective value
they received; and (4) full refund restitution would be inequitable because it would put
Defendants out of business. The final question is whether the district court abused its
discretion in failing to grant restitution.
{47} An abuse of discretion occurs “when the trial court’s decision is clearly untenable
or contrary to logic and reason.” Cont’l Potash, 1993-NMSC-039, ¶ 26 (internal quotation
marks and citation omitted). In this case, the district court was correct in determining that
Defendants violated Section 57-12-2(E)(1), and the loans were procedurally unconscionable.
6
Nineteen and a half percent of New Mexicans live below the poverty level,
compared to 14.9 percent of people nationwide. See United States Census Bureau, State and
County QuickFacts, New Mexico, Persons below poverty level, percent, 2008-2012,
http://quickfacts.census.gov/qfd/states/35000.html. Thirty-five percent of New Mexico
households are unbanked or underbanked, compared to 28.3 percent of households
nationwide. Federal Deposit Insurance Corporation, 2011 FDIC National Survey of
Unbanked and Underbanked Households, Appendices A-G, Table C-1, 2011 Household
Banking Status by State at 126, www.fdic.gov/householdsurvey/. More New Mexico
households are unbanked and underbanked than anywhere in the Northeast, Midwest, or
West. Id. Only six states have a higher or the same percentage of underbanked households:
Alabama, Arkansas, Georgia, Louisiana, Mississippi, and Texas. Id. Only three states have
a higher percentage of unbanked households: Arkansas, Mississippi, and Texas. Id.
17
On that basis alone, the district court could have voided the contracts entirely. Loans need
not be both procedurally and substantively unconscionable to be invalidated by a court.
Cordova, 2009-NMSC-021, ¶ 24 (“[T]here is no absolute requirement in our law that both
[substantive and procedural unconscionability] must be present to the same degree or that
they both be present at all” in order to invalidate a contract.). Thus, where, as in this case,
there is overwhelming evidence that the loans were procedurally unconscionable, no
evidence of substantive unconscionability is needed in order to invalidate the contract.
However, in this case, we hold that the interest rate terms were substantively
unconscionable. Given the fact that these loans were both substantively and procedurally
unconscionable, it would not have been an abuse of discretion to invalidate the entirety of
the contracts. See, e.g., Rivera, 2011-NMSC-033, ¶ 56 (invalidating the entire arbitration
scheme on substantive unconscionability grounds); Cordova, 2009-NMSC-021, ¶ 40 (same).
{48} Moreover, “[i]n the UPA, the Legislature has provided for damages and other
remedial relief for persons damaged by unfair, deceptive, and unconscionable trade
practices. Since the UPA constitutes remedial legislation, we interpret the provisions of this
Act liberally to facilitate and accomplish its purposes and intent.” Quynh Truong v. Allstate
Ins. Co., 2010-NMSC-009, ¶ 30, 147 N.M. 583, 227 P.3d 73 (internal quotation marks and
citations omitted). It is the task of the courts to “ensure that the Unfair Practices Act lends
the protection of its broad application to innocent consumers.” Ashlock v. Sunwest Bank of
Roswell, N.A., 1988-NMSC-026, ¶ 7, 107 N.M. 100, 753 P.2d 346, overruled on other
grounds by Gonzales v. Surgidev Corp., 1995-NMSC-036, ¶ 16, 120 N.M. 133, 899 P.2d
576. In order to facilitate the consumer-protective legislative purpose of the UPA, there was
ample reason to grant restitution to borrowers for Defendants’ unconscionable trade
practices. It would not further the purpose of the UPA under these circumstances to allow
Defendants to retain the full profits of their unconscionable trade practices. Thus, the district
court abused its discretion in failing to grant any form of restitution. Nevertheless, we agree
with the district court that it would be inequitable to allow borrowers to pay no interest at
all.
{49} When a contract term is unconscionable, like the 1,147.14 to 1,500 percent interest
rates in this case, the court “may refuse to enforce the contract, or may enforce the remainder
of the contract without the unconscionable term, or may so limit the application of any
unconscionable term as to avoid any unconscionable result.” Padilla v. State Farm Mut.
Auto. Ins. Co., 2003-NMSC-011, ¶ 15, 133 N.M. 661, 68 P.3d 901 (internal quotation marks
and citations omitted). We decline to grant a windfall to all borrowers by allowing them to
completely avoid the contracts. We hold instead that the quadruple-digit interest rate, a
substantively unconscionable term, shall be stricken from the contracts of all borrowers. We
then enforce the remainder of the contract without the unconscionable term. Id.
{50} The district court avoided calculating restitution, calling the task “arbitrary and
unjustified” without precise figures to draw upon. However, the New Mexico statutes
provide a default interest rate that allows “private lenders to charge interest on money debts
at the legal rate where the contract is silent on the issue.” Martinez v. Albuquerque
18
Collection Servs., Inc., 867 F. Supp. 1495, 1508 (D.N.M. 1994) (citing 47 C.J.S. Interest &
Usury § 11 (2014) “(promise to pay interest at the legal rate implied at law)”). Fifteen
percent is the maximum allowable default interest rate. Section 56-8-3(A) (“The rate of
interest, in the absence of a written contract fixing a different rate, shall be not more than
fifteen percent annually . . . on money due by contract.”); Sunwest Bank of Albuquerque,
N.A. v. Colucci, 1994-NMSC-027, ¶ 24, 117 N.M. 373, 872 P.2d 346 (holding that Section
56-8-3 “fixes the maximum rate” that can be awarded by the district court). The default rate
under Section 56-8-3 is calculated as simple interest. See Consol. Oil & Gas, Inc., v. S.
Union Co., 1987-NMSC-055, ¶ 42, 106 N.M. 719, 749 P.2d 1098 (holding that Section 56-8-
3 must be calculated as simple interest); c.f. Peters Corp. v. N.M. Banquest Investors Corp.,
2008-NMSC-039, ¶¶ 51-52, 144 N.M. 434, 188 P.3d 1185 (distinguishing Section 56-8-3
from another statutory section whose express language allows for compound interest).
Because the unconscionable interest rates in Defendants’ loans are invalid terms, these
contracts are silent with respect to rates. We apply the statutory default interest rate of 15
percent simple annual interest to these loans.
{51} Defendants must refund all money collected by Defendants on their signature loans
in excess of 15 percent of the loan principal as restitution for their unconscionable trade
practices. We recognize that the district court could have fashioned a remedy whereby the
borrowers would pay less for these loans by either setting a default interest rate lower than
the statutory maximum of 15 percent, or by imposing an amortization schedule on the loans
under which the total finance charge on the 15 percent simple interest loans would amount
to less than 15 percent of the whole principal. We decline to do so here for the sake of equity
and to prevent delay. Instead, Defendants will keep the maximum allowable interest of 15
percent under Section 56-8-3 and refund the remainder of the monies that the borrowers paid
on their loans that is over 15 percent of the principal. For example, Oscar Wellito’s $100
loan with 1,147.14 APR is now rewritten as a $100 loan with 15 APR. With simple interest,
he therefore owes $115 on the contract. He paid Defendants a total of $160.64. Defendants
must refund $45.64 to Mr. Wellito, which is the difference between the monies he paid on
their unconscionable contract, $160.64, and the monies he owes under the reformed contract,
$115. Because these contracts are unconscionable, Defendants must also refund any
penalties or fees they collected from borrowers that were associated with missed, late, or
partial payments.
IV. CONCLUSION
{52} We hold that loans bearing interest rates of 1,147.14 to 1,500 percent contravene the
public policy of the State of New Mexico, and the interest rate term in Defendants’ signature
loans is substantively unconscionable and invalid. We therefore reverse the district court’s
ruling on substantive unconscionability. We affirm the district court’s ruling that Defendants
engaged in procedurally unconscionable trade practices, and uphold the permanent
injunction granted against Defendants. Accordingly, we affirm in part, reverse in part, and
remand to the district court for a determination of damages in accordance with this opinion.
19
{53} IT IS SO ORDERED.
____________________________________
EDWARD L. CHÁVEZ, Justice
WE CONCUR:
____________________________________
BARBARA J. VIGIL, Chief Justice
____________________________________
PETRA JIMENEZ MAES, Senior Justice
____________________________________
RICHARD C. BOSSON, Justice
____________________________________
CHARLES W. DANIELS, Justice
20