Class Action

New Missouri payday loan reform bill discussed at public hearing.
2010-02-24

Posted By: Erich V. Vieth

Payday loans are high-interest short-term unsecured small loans that borrowers promise to repay out of their next paycheck, typically two weeks later. Interest rates are typically 300% to 500% per annum, many multiples higher than the exorbitant rates charged by banks on their credit cards. A typical payday borrower takes out payday loans to pay utility bills, to buy a child’s birthday present or to pay for a car repair.  Even though payday loans are dangerous financial products, they are nonetheless tempting to people who are financially stressed.  The growth of payday lenders in the last decade has been mind-boggling.  In many states there are more payday lenders than there are McDonald’s restaurants. In Missouri Payday lenders are even allowed to set up shops in nursing homes.
 
On Thursday night, February 18, 2010, Missouri State Senator Joe Keaveny and State Representative Mary Still jointly held a public hearing at the Carpenter Branch Library in the City of St. Louis City to discuss two identical bills (SB 811 and HB 1508 that would temper the excesses of the payday loan industry in Missouri.  The payday lenders packed the legislative hearing room with their employees. I was finally allowed into the meeting at 8 pm, which allowed me to catch the final 30 minutes. Almost all of the people who filled the meeting room chairs were payday lender employees (concerned citizens were forced to stand in the back of the room). 

Missouri’s payday lenders are fighting a proposed new law that would put some sanity into a system that is often financially ruinous for the poor and working poor.  Payday lenders claim that the caps of the proposed new law would put them out of business.  This claim is preposterous.

The proposed bills don’t outright ban payday lenders from Missouri.  Rather, the bills give payday lenders the ability to charge high interest rates (up to 35%) and “loan setup fees” (up to an additional 5% on a 90 day loan) on their loans.  This additional “setup” fee is the equivalent of 20% more interest per annum (for loans paid off in 90 days) and the equivalent of 130% per annum (for those customers who pay off their payday loan in 2 weeks). The new law thus gives payday lenders the ability to earn 55% (35% interest + 20%) on loans that are paid off within 90 days and 165% (35% interest + 130%) on loans that are paid off within 2 weeks.  Keep in mind that 20% would be a high rate of interest on a credit card.  Consider also that paying 460% interest on a payday loan of $500 is the equivalent of paying 5.8% interest on a loan of $40,000.  

Bottom line – the proposed new law would allow payday lenders to charge between 55% and 165% on the money they lend out.   But that’s not good enough for the payday lenders, because they want to continue charging obscene amount of interest, 400% or more.  Keep in mind that payday lenders weren’t the first to rake the working poor with high interest loans where the payment was due on the customer’s payday. That tactic was commonly used more than 100 years ago, and we used to call those lenders “loan sharks". We outlawed those types of loans back then, because the financial services industry wasn’t as powerful as it is today.

The proposed new law also would make a second change that the payday lenders will resist even more than the 35% interest rate cap.  The new law would prohibit payday lenders from making any new loan to a borrower until one week has passed after that borrower fully paid off an existing payday loan.  This provision was designed to prevent payday lenders from creating a continuous series of fake “new” loans to stretch out the original loan as far as possible.  Using fake new loans, the borrower pays the interest accruing over the past pay period (a typical example would pay $70 of pure interest every two weeks on a 469% loan of $400), and an unscrupulous payday lender would repeat this as often as possible. 

Payday lenders are motivated to make these fake new loans because the current law allows only six “renewals” (extensions of the original loan for an additional pay period).  They also like fake new loans because current law also limits total interest and fees to 75% of any particular loan; it is much more profitable to make many “new” loans because the 75% cap is quickly exhausted over the course of any one loan since payday lenders charge such high interest rates.

Why do these people keep taking out loans that they can’t afford to pay off?   To address this issue, one must start with the assumption that most consumers are bad at math. This is a proven fact.   For instance, 60% of Americans can’t add two simple numbers and calculate 10% of the total. Based on this undeniable fact, we immediately come to a fork in the road.  Given that our state has millions of people afflicted with innumeracy, what shall we do about it?  Should we allow these math illiterate people to keep getting victimized by products that they shouldn’t be buying?  Or should we, instead, rein in sophisticated lenders who are profiting from the aggregate misery they are inviting?  The answer is clearly the latter, given that society at large needs to deal with the mess created by the irresponsible actions of payday lenders.

Consider further, this compelling hypothetical offered by Elizabeth Warren with regard to defective toasters (her example was a comment on the danger of predatory home mortgages, but the logic can easily be extended to payday loans):

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance your home with a mortgage that has the same one-in-five chance of putting your family out on the street—and the mortgage won’t even carry a disclosure of that fact. Similarly, it’s impossible for the seller to change the price on a toaster once you have purchased it. But long after the credit-card slip has been signed, your credit-card company can triple the price of the credit you used to finance your purchase, even if you meet all the credit terms. Why are consumers safe when they purchase tangible products with cash, but left at the mercy of their creditors when they sign up for routine financial products like mortgages and credit cards? . . . Consumers entering the market to buy financial products should enjoy the same protection as those buying household appliances.

Speaking of the sophisticated lenders, bear in mind that current Missouri law prohibits a payday lender from making a loan to any customer unless the lender has “considered” the financial ability of that borrower to reasonably repay the loan.  The problem is that most payday lenders flagrantly violate this requirement.  In the real world, most payday lenders put on blinders.  They merely look for the existence of a checking account and a pulse.  In my consumer law practice, I have never yet seen any indication that any payday lender has actually considered the income stream and current indebtedness of any borrower before making a loan.  They don’t care if borrowers can barely able to make their house payments, car payments, child support payments and utilities payments?  In fact, such people would be perfect customers. 

What is the damage done by payday loans?   Consider the financial damage done to a borrower who has taken out a payday loan of $500 at 400% interest, where the loan is stretched out for a year (by converting the original loan to a series of fake new loans).  After paying almost $2,000 in interest over a year, such a borrower would still owe the payday lender $500 principle.  That original loan of $500 looked so very tempting, but it was the financial equivalent of crack cocaine.  It’s pretty amazing, that payday lenders can squeeze that kind of money out of so many desperate people.  Those unending interest payments create a huge sucking sound, as scarce money that should be going to pay electric bills, medicine and school supplies feed the profits of big companies that are smart enough to have tricked the Missouri Legislature into believing that they were offering “short-term” loans.  And, of course, the damage isn’t only financial—payday loans also cause human tragedy.  Research has suggested that payday loans often lead to terrible problems such as foreclosures and bankruptcy.  Truly, why should we allow such loans at all?  Yes, these customers were financially stressed before they took out the payday loans, but that financial desperation is multiplied by many months whenever they step into a payday store. .

Near the end of Thursday night’s meeting, long after the television cameras had packed up and headed back to the stations with footage of the slick presentation by representatives of the payday industry, attorney John Campbell was allowed to comment on some of these issues from the consumer’s perspective.  John also addressed some of the many false claims still being made by payday lenders as part of their efforts to trash the proposed new Missouri law.

John and I work together here at the Simon Law Firm in St. Louis.  We are currently litigating several complex class actions against some of the biggest payday lenders in Missouri.  It’s the same problem over and over: payday lenders systematically violate the weak payday lending laws that currently exist in Missouri.

In addition to systematically violating the laws of Missouri, most payday lenders compound the problem through legal trickery.  They make customers sign contract provisions prohibiting class actions and class arbitrations (e.g., see this extremely difficult-to-read arbitration agreement presented to the customers of Quik Cash).  In our pending suits, John and I have successfully argued that payday lenders (and other merchants) work hard to get their customers to sign mandatory arbitration clauses that (on their face) prevent customers from bringing any class proceedings.  Missouri appellate courts have recently agreed with us that these “class waivers” (the clauses prohibiting customers from bringing class actions or class arbitrations) are unconscionable and thus unenforceable (here is the opinion of the Missouri Court of Appeals in Woods v. QC Financial, where the Court struck the class waiver of Quik Cash, Missouri’s biggest payday lender.  For deep insight into the problems with these arbitration clauses, consider viewing this video deposition excerpt by consumer attorney Bernard Brown, who eloquently explains why class waivers are so unfair to consumers.

In another recent case, John and I convinced the Court of Appeals to ban class waivers in “title loans,” an even more reprehensible financial product (where the customer is required to hand over the keys to the family car and the title as part of the loan application).  Therefore, Missouri consumers can now bring class actions on behalf of large classes of customers of high interest lenders for the systematic violations of Missouri payday lending laws.

In our class claims against payday lenders, this firm has alleged that Missouri’s largest payday lenders:
  A) failed to consider the financial ability of the borrower to reasonably repay the loan in the time and manner specified in the loan contract; or
  B)  charged a total amount of accumulated interest and fees exceeding seventy-five percent of the initial loan amount of that loan for the entire term of that loan and all renewals of that loan, or
  C) did not reduce the principal amount of the loan by at least five percent of the original amount of the loan as part of any renewal; or
  D) renewed the loans more than six times.

Representatives of St. Louis Community Credit Union also appeared at the hearing.  They indicated that they are making money by issuing 25% APR 90-day loans.  Further, there is a forced savings component built into the program.  Consumers taking out these loans will be actually putting 10% of the money borrowed into their own accounts in the process of paying back the 90-day loan.  In other words, a credit union are issuing the kinds of  low interest loans that payday lenders claim will put them out of business.  In fact, quite a few Missouri credit unions are issuing these loans, and making money doing so.

You might be surprised that I haven’t discussed usury laws anywhere in this post.  If you were under the impression that there were usury laws, you’re in for a surprise.  There used to be usury laws, but they have now been loosened up for financial institutions to the point where they are essentially non-existent.  See this excellent article by Chris Peterson.

Interestingly, the proposed Missouri law is similar to a federal law passed to protect members of the military from these same predatory loans.  It would seem that we should protect people who are not members of the military for the same reasons that we should protect those who are members of the military.  No person should be allowed to be victimized by predatory lenders.  That is why I am in support of the bills to reform the payday loan industry in Missouri.