Guilt-Free Markets? Unconscionability, Conscience, and Emotions

People tend to do what they think is morally correct, and to avoid what they think is immoral.1Rightness and wrongness . . . are things we feel.2IntroductionIn a market society characterized by record-level socio-economic inequalities, many business opportunities for exploitation arise. Greed competes with conscience; to exploit or not to exploit becomes a pressing question. Each time greed wins, an oppressive contract is born, depriving the exploited party of limited resources, further enriching the exploiter, and increasing the ever-growing gap between the powerful and powerless.Such was the case of Henrietta Charley as described in a 2014 decision of the Supreme Court of New Mexico.3 Ms. Charley worked hard to make ends meet. A mother of three and a medical assistant earning $10.71 per hour working in a medical center, she found herself under financial distress and had to take out a loan of $200 "to buy groceries and gas."4 Although she had never done this before,5 taking the loan was easy. The lender's storefront was one of many similar businesses crowding Farmington's Main Street, only a few minutes' drive from Ms. Charley's workplace.6 Inside, employees of "Cash Loan Now" were trained to offer a swift ten-minute lending process to anyone with a job.7 They were instructed to misrepresent the interest rate in daily terms ranging "between $1.00 and $1.50 per day" for every one hundred dollars borrowed.8 The lender's manuals further scripted the interactions with the borrowers, requiring employees to conceal the payment schedule and never explain that the loan was interest-only.9 It was only much later that Ms. Charley realized that "she would have to make sixteen biweekly payments of $90.68 each before any of her payments would be allocated toward her principal."10 The terms of the schedule had been purposely buried in her file.11 Misleading Ms. Charley and taking advantage of her financial distress and lack of experience, the lender awarded her a $200 loan that in reality carried a total finance charge of $2,160.04, equal to a 1,147.14 APR (annual percentage rate).12 When sued, the lender cited a loophole, arguing that since it intentionally converted its loan products from payday loans to "signature" loans,13 Ms. Charley's loan agreement was legal and therefore should not be invalidated by courts.14Unfortunately, Ms. Charley's loan agreement is by no means rare. In the world of fringe banking-the exploding industry of high-cost loans such as payday and auto-title loans-borrowers can only get credit under predatory terms, at sky-high costs that worsen their vulnerable financial state. Despite borrowers' seeming consent to such loan agreements, the marks of exploitation15 are obvious: intentional targeting,16 calculated misrepresentation,17 callous taking advantage of others' distress,18 and the imposition of egregious interests and fees.19How should the law respond to exploitative market behaviors that yield predatory contracts? By and large, our legal system delegates the problem to the judiciary. Admittedly, many greed-born contracts slip under the legal radar because the exploited parties simply lack the means, monetary and otherwise, to seek legal help. The exploiters, on the other hand, frequently rely on the law for enforcement of their contracts. Any time litigation ensues, courts must choose between greed and conscience, exploiters and exploited, and enforcement and non-enforcement. Courts are faced with a difficult dilemma: ignore the problematic behavior of the stronger party or follow their sense of moral correctness and refuse to support unscrupulous behavior. There is no doubt that courts are authorized to invalidate unfair contracts. Legislation and precedents have established a variety of legal tools that the courts may use, foremost among which is the unconscionability20 principle.21 There is, however, a greater doubt-and an unresolved debate-on the normative question of how courts should utilize this principle. …