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Internet Payday Loans, Arbitration Clauses, and Agreements Not to Bring Class Actions

posted by Nathalie Martin

You know a case before the New Mexico Court of Appeals is a big when  lots of out of town lawyers come to argue the case. And, so it was in the case of Andrea Felts, heard on January 19, 2011. Ms. Felts, a high school vice principal, took out  internet payday loans when going through a divorce, one at 684 percent per annum, and another at 730 percent. After paying back more than she borrowed in just a few months, she found a consumer lawyer to bring a class action against the two lenders, CLK Management and Cash Advance Network Inc., for unconscionability and unfair practices. One small detail….language buried in the click-through screens in her on-line “contract” said any disputes between the parties must be arbitrated, and also that she could not bring a class-action lawsuit.

In defending the suit, the lenders first denied they made or were connected to whoever made these loans. Next, they claimed to have tribal sovereign immunity. Next, they argued that they could not be brought to court because of the arbitration and class action waiver clause.  This is where it gets interesting! While it is unclear whether an agreement not to bring a class action is ever enforceable, in order for an arbitration clause to be enforceable in this context, the clause must be “clear and unmistakable” under U.S. Supreme Court case, Rent a Center v. Jackson.

The lawyers in the Felts case sparred extensively about whether a very lengthy arbitration clause in the contract was “clear and unmistakable.” Two lenders' lawyers argued that different 8 or 12-word clauses were the part that made the clause “clear and unmistakable.”One offered different “clear and unmistakable” language than he had identified as clear and unmistakeable in his previously- filed brief. One 168-word sentence in the arbitration clause provoked an exchange between Judge Cynthia Fry and an Omaha attorney defending one of the loan companies.

        "So you're saying it (the relevant wording) ends at the comma ... not at the period that comes some distance later?" Fry asked.
        "Yes, your honor," Messineo said.
        "That's pretty hairsplitting if you ask me," Fry responded.

The clause in question has18 commas and seven places where the word "or" appears.         

As most readers likely know, payday lenders hold a borrower's post-dated check or tap directly into his or her bank account to withdraw the money on payday. With most traditional loans, the principal and interest are paid down in regular installments. With a payday loan, however, the borrower must pay off the whole loan on the next payday. That's often impossible, so people repeatedly pay the fees with nothing going to the principal. Also, many of the loans are set up procedurally so that it is difficult to pay off the whole loan even if you want to. 

A New Mexico statute allows payday lenders to charge up to 417 percent annual interest. But as Felts' situation shows, interent payday loan companies feel they need not comply with state laws.  


A question on the high percentage numbers thrown around in these cases -- is this the actual percentage rate quoted, or is it the effective rate after a fee is included? I ask because I have a checking account through one of the "too big to fail" US banks. They stuck a payday advance "feature" on it. The interest rate is somewhere around 20%, but there's a fixed $25.00 fee to use the advance.

If I borrow $100.00 the day before payday, I pay $25 (plus a few cents "interest"). This works out to an annual percentage rate in the thousands. Yet a 2 day loan under the same terms ends up half the rate.

In the couple detailed statements I've seen on payday loans the percentage rate ends up computed by adding a fixed fee ($75 is the number quoted) plus an interest rate in the 40-60% range, resulting in a "hundreds of percent" inter

So are these 684% and 730% numbers the stated loan interest rate, or computed based on borrowing X dollars and having to repay "X+Y", which works out to the high rate?

I'll do this as a separate comment as it's on a different subject. On April 1 (I think last year), a British company put a clause in their license agreement giving them rights to your immortal soul. They say nobody caught it, everybody just clicks through the agreement. Will this end up part of a court case of this sort? Not that most people read loan, credit card, or other legal agreements either...

Thomas, I think I know which bank or banks you are talking about, but would not mind confirming. You can e-mail me directly if you like. I know someone at my own former bank who has bounced a check or two. Every time she sticks her ATM in the bank ‘s ATM machines, she gets asked if she wants to take out one of those direct deposit advances, allegedly at 10 or 20%. The 20% they allege to be charging is 20% once or twice a month! Or, annualized, 240-480%.

To reach the 700% figures charged to Andrea Felts, we are including all fees, the total cost of credit and then annualizing the amount. This is done to comply with Truth in lending Act, so consumers can compare the cost of credit to other options. The fact that the credit may not be taken out for a full year is no reason not to annualize, any more than it is frivolous to state the MPR just because we don’t travel a full mile.

As for the second comment, I am so glad you brought this up. You and others might be interested in a MUST READ article by NYU law professor Florencia Marotta-Wurgler, showing that, surpise surprise, people do not read these click through screens.

Hmm... I'm not sure that "mandatory/binding" arbitration is always a bad thing. Stark v. EMC Mortgage. EMC enforced a binding arbitration clause in the Stark's mortgage after the Starks filed litigation due to an illegal foreclosure/changing of locks situation.

Arbitrator ultimately ended up awarding the Starks $6 Million citing "disgorgement" if I remember correctly. Arbitrator based the figure on 1/10 of one per cent of company value at the time. EMC appealed. EMC lost.

Maybe we just need better, more well informed arbitrators involved in the process... But I do understand and agree with the direction from which you are coming Professor Martin...

I think that the quality of arbitration varies by industry. Securities arbitration is generally okay, although it did very poorly with gender cases in the 1990s. (Some of the arbitrators honestly believed that if it's not rape, it can't be sexual harassment!) Commercial arbitration is also pretty good, although it is the least adhesive form of arbitration. Credit card arbitration is a cesspool--the industry drops arbitrators who don't find in its favor. I recollect that Hooters had an employment arbitration agreement that was so one-sided that the very conservative Fourth Circuit invalidated it.

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