Reassessing
Payday Lenders in
the Wake of
Their Most
Negative
Court Holding
to Date
By Joshua Cooper*
INTRODUCTION
O
n June 26th, 2014, the New Mexico Supreme Court held, in State ex rel. King v. B&B Investment
Group, Inc., that loans issued by so-called “payday lenders” may be deemed unconscionable even if
a loan’s contractual terms are within the scope of codified law. The decision is the first issued by a
state’s highest-level court to hold that payday loans, even if technically “legal” under state law, may nonetheless be deemed unconscionable under the aggregate circumstances of a given situation. While the payday
loan industry has largely evaded significant scrutiny in courts of law, the New Mexico court’s holding in
B&B could reflect a broader shift in beliefs that the controversial industry is long overdue for substantive
oversight – particularly in Texas, where payday loans remain entirely unregulated at the state level.
Journal of Consumer & Commercial Law
15
CASE
Defendant B&B Investments was a subprime lender from
Illinois that opened storefront lending operations in three New
Mexico cities in the early 2000s.1 Although most of the loans it
issued during its first years of operation were traditional payday
loans, in 2006 B&B introduced a new lending instrument called
a “signature loan.”2 Unlike its payday loans, which typically matured in 35 days or fewer, B&B’s signature loans matured over the
course of a full year.3 Even though borrowers’ principal amounts
were generally small, in some cases as little as $50, B&B nonetheless charged effective annual percentage rates (APRs) of up to
1,500 percent.4
Further, the company targeted its loans to financially
unsophisticated, low-income, and often-desperate consumers.5
In an example cited by the court, Henrietta Charley, a medical
assistant and single mother of three, worked 32 hours a week
at a pay rate of $10.71 per hour. Although her take-home pay
was approximately $615 every two weeks, her monthly expenses exceeded $1,000 – not including food and gas.6 When her
ex-husband failed to pay his court-stipulated child support on
a regular basis, Charley found herself in need of a loan simply
to pay for groceries and gas.7 She visited a B&B storefront
and took out a signature loan for a mere $200. By the time
the loan matured, however, the total finance charge due was
$2,160.64.8
After receiving numerous consumer complaints alleging unfair business practices on B&B’s part, the New Mexico
Attorney General brought suit alleging that the company’s
lenders created and
High-interest, short-term marketed loan instruments that were
lending vehicles such as
procedurally
and
payday and auto-title
substantively unconloans have been matters
scionable and violatof controversy among
ed the New Mexico
state regulators and conUnfair Practices Act
(UPA).9 While the
sumer-protection groups
trial court found that
for quite some time.
the defendant’s loans
were procedurally unconscionable, they declined to hold them
substantively unconscionable on the basis that the New Mexico legislature had explicitly refrained from issuing any regulations or guidance concerning caps on payday-loan APRs.10 The
New Mexico Supreme Court disagreed and, in reversing the
lower court’s ruling, stated that “[c]ourts 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.”11 The court further noted
that, “ruling on substantive unconscionability is an inherent
equitable power of the court, and does not require prior legislative action.”12
ANALYSIS
Payday lending has emerged as of late as a topic of national interest. A consumer advocacy group called National People’s Action, for instance, recently placed ads on the Discovery
Channel’s popular “Shark Week” programming comparing the
predatory lending practices of payday lenders to literal sharks,
and in August 2014 the HBO late-night series “Last Week Tonight with John Oliver” dedicated a majority of an episode to
the topic, advising Americans to “literally do anything else” other
than borrow from a payday lender.13 Furthermore, the CFPB is
currently considering promulgating national rules such as mandatory-disclosure requirements and across-the-board interest-rate
caps to rein in payday lenders.14 Negative attitudes concerning
16
payday lenders appear to be considerably on the rise, and at least
the inklings of a national movement to put an end to their unjust
practices seems to be emerging.
Still, high-interest, short-term lending vehicles such
as payday and auto-title loans have been matters of controversy
among state regulators and consumer-protection groups for quite
some time. In addition to their generally-astronomical interest
rates, numerous studies have shown that these types of loans consistently target America’s most vulnerable consumers. In particular, payday lenders’ most prolific customers are people with low
incomes, no formal bank accounts, and little access to traditional
types of loan collateral; those who have recently suffered setbacks
such as loss of employment or illness of an immediate family
member; and consumers who have never finished high school, let
alone college, and are largely ignorant of the repercussions payday
loans often entail.15
In addition to charging high interest rates, payday lenders have come under fire for their aggressive targeting of minority
consumers, as well as their equally aggressive collection tactics.
In Texas, the CFPB recently took enforcement action against
Irving-based ACE Cash Express for using, “unfair, deceptive and
abusive” practices to collect payday-loan debts.16 The increasingly
ubiquitous presence of payday and other short-term loan outlets
in areas with large minority populations, coupled with advertising that deceptively makes them appear to be an “easy way” of
obtaining “fast cash,” only serve to worsen an already troubling
situation.17
These practices have not gone unnoticed, however, and
a number of states have put regulations in place to regulate the
playing field between lenders and consumers. Florida and Virginia, for instance, mandate a waiting period of at least one day
after a loan is repaid before a lender can make another, separate
loan to the same borrower.18 19 Other states have passed interest
rate caps on payday loans: New York limits them to 25 percent,20
and Virginia has a statewide cap of 36 percent.21
While Texas once capped payday-loan interest rates at
10 percent, pursuant to its usury laws, payday lenders figured
out a way to skirt the regulation. Using laws originally designed
for companies that repair credit, payday lenders began refashioning themselves as “credit service organizations” (CSOs).22 The
moniker stems from the state’s Credit Service Organization Act
of 1987, which allows companies to register with state authorities
and provide fee-based services for the purpose of helping customers improve their credit rating. CSOs can also help consumers
obtain loan extensions through third-party lenders.23 In essence,
the CSO functions as a broker between the lender and borrower, charging a fee for the service of “connecting” the two. In the
hands of a payday lender, however, this CSO “fee” is not counted
as interest, so the lender effectively avoids paying the 10 percent
cap required under Texas usury laws.24
In 2004, however, a case involving the exploitation of
CSO loopholes made it all the way to the Fifth Circuit. In Lovick
v. Ritemoney Ltd., the court concluded that CSO fees did not constitute “interest” per se, and were thus not subject to Texas usury
laws. 25 The plaintiff, Betty R. Lovick, had obtained a $2,000
auto-title loan from a broker that utilized the lending services of
the defendant, Ritemoney. Lovick’s loan was set at an ostensible
APR of 10 percent, but on top of that amount she agreed to pay
a $1,500 fee to the broker for “loan brokerage or other credit services.”26 Lovick’s claim was dismissed on summary judgment by
the trial court before the Fifth Circuit Court of Appeals accepted
it for adjudication. Although the circuit court noted that, “to say
the least, a $1,500 fee for a $2,000 loan is more than questionable,”27 it ultimately affirmed the case’s dismissal, concluding that
“[since] the Texas Legislature has not restricted the amount of a
Journal of Consumer & Commercial Law
may only be refinanced a total of three times, while installment
loans are restricted to no more than four payments.38 Further, the
principal owed must fall by at least 25 percent with each installment or refinancing of the loan.39 Houston’s new regulations are
similar to ones already passed by city officials in Austin, Dallas,
El Paso, and San Antonio.40 Of Texas’ six largest cities, only Fort
Worth still lacks any regulations on payday and auto-title lending.41 Unsurprisingly, industry lobbyists have vowed to challenge
the ordinances in court.42
CSO service fee in proportion to the services provided[,] we cannot substitute our judgment.”28
The question to be asked, then, is why the Texas legislature has failed to engage in any substantive action to regulate payday loans. A likely answer lies in the significant lobbying
power of the payday-lender industry. During the 2013 Texas legislative session alone, payday loan companies spent over $4.4 million on lobbyists advocating their cause.29 Further, the industry’s
campaign contributions to members of the legislature doubled
between 2008 and 2012, with House Speaker Joe Straus receiving
a substantial $312,000.30 When Sen. Wendy Davis tried to initiate meaningful reforms in 2011, lawmakers outright rejected her
proposal and instead backed a much weaker package sponsored
by then-House Financial Services Committee Chair Vicki Truitt. In a turn of events unlikely to surprise an astute observer of
Texas politics, Truitt left office and is now employed as a lobbyist
for payday lender ACE Cash Express.31 Further, Texas Finance
Commission Chairman William White has repeatedly resisted
attempts to regulate payday lenders via legislative means. A reasonable observer might question whether White’s objections have
something to do with the identity of his employer when the legislature is not in session: Cash America, a leading payday lender.32
On the brighter side, the Texas Senate managed to pass its firstever payday-loan regulation bill with actual teeth, SB 1247, during its 2013 session. The bill capped payday-lender interest rates
at 36 percent, among other reforms, and would have likely inflicted a substantial blow
As a result of the legis- to the payday-lending
juggernaut in Texas.33
lature’s failure to pass
meaningful payday-loan Alas, the Texas House ultimately killed the bill, with
reform, Texas cities
Rep. Charles “Doc” Anhave taken to regulatderson – himself a recipiing the industry at the
ent of $25,000 in payday
municipal level.
lobby money – opining,
“[payday lending] allows
individuals to exercise their freedom.”34 One wonders how the
broader goal of “freedom” is achieved when hard-working Americans are stuck with an albatross of a loan with a 1,000 percent
interest rate. If anything, such consumers have significantly less
freedom of choice while between a rock and a hard place paying
off high-interest loans.
As a result of the legislature’s failure to pass meaningful payday-loan reform, Texas cities have taken to regulating the
industry at the municipal level.35 The city of Houston passed a
reform package that went into effect on July 1, 2014.36 Payday
loan principals are now capped at 20 percent of a borrower’s gross
monthly income, and auto-title loans are restricted to 3 percent of
a consumer’s gross annual income or 70 percent of the car’s value,
whichever is lower.37 Additionally, single-payment payday loans
Journal of Consumer & Commercial Law
CONCLUSION
The New Mexico Supreme Court’s holding in State ex
rel. King v. B & B Investment Group reflects an evolving national
sentiment in regard to payday-lending practices—they prey upon
some of the nation’s most vulnerable consumers and charge interest rates that were once upon a time associated solely with the
illegal practice of loan-sharking. As a result of the court’s decision,
consumers may have the weapon of unconscionability claims
against payday lenders at their potential disposal. It is entirely
likely that other state courts – and, possibly, federal courts – may
follow New Mexico’s lead in bringing much-needed judicial oversight of the industry. Payday lenders and their supporters-cumenablers are not likely to take such challenges lightly, however,
and will almost certainly aim to maintain the status quo, particularly in the minority of states with no payday-industry regulations
of any kind. For the time being, payday lenders are likely to continue seeking any exploitable legal loopholes they can find.
*Joshua Cooper is a third-year law student at the Univ. of Houston
Law Center.
1
State ex rel. King v. B&B Inv. Grp, Inc., 329 P.3d 658, 662 (N.M.
2014).
2
Id.
3
Id.
4
Id.
5
Id.
6
Id. at 664.
7
Id.
8
Id.
9
Id.; see also N.M. Stat. Ann. § 57-12-2.
10
Id. at 662-63.
11
Id. at 670.
12
Id. citing the landmark case of Williams v. Walker-Thomas Furniture
Co., 350 F.2d 445 (D.C. Cir. 1965).
13
The John Oliver segment may be found at, http://www.youtube.
com/watch?v=PdylgzybWAw. See also Mandi Woodruff, The Reign of
Payday Lenders May Soon Be Over, Yahoo Fin. (Aug. 13, 2014), http://
finance.yahoo.com/news/the-reign-of-payday-lenders-may-soon-beover-201715917.html.
14
Heather S. Klein, CFPB Payday Loan Rulemaking is Imminent and
Will Target Repeated Borrowing, CFPB Monitor (Mar. 25, 2014), http://
www.cfpbmonitor.com/2014/03/25/cfpb-payday-loan-rulemaking-isimminent-and-will-target-repeated-borrowing/.
15
See, e.g., Kathleen Burke et al, CFPB Data Point: Payday Lending,
CFPB Office of Research (March 2014), http://files.consumerfinance.
gov/f/201403_cfpb_report_payday-lending.pdf.
16
CFPB Takes Action Against ACE Cash Express for Pushing Payday
Borrowers Into Cycle of Debt, CFPB Office of Research (Jul. 10, 2014),
http://www.consumerfinance.gov/newsroom/cfpb-takes-action-againstace-cash-express-for-pushing-payday-borrowers-into-cycle-of-debt/.
17
Id.
18
Fla. Stat. § 560 et seq.
19
Va. Code Ann. § 6.2-1816.
20
NY CLS Penal § 190.40.
17
Va. Code Ann. § 6.2-1817.
Better Business Bureau of Metropolitan Dallas, The Payday Loan
Industry of Dallas, Texas, BBB of Metropolitan Dallas (Jan. 2012),
http://www.texasfairlending.org/wp-content/uploads/2013/01/BBBDallas-on-Payday-Loan-Industry.pdf
23
Id. at 3.
24
Id.
25
Lovick v. Ritemoney Ltd., 378 F.3d 433 (5th Cir. 2004).
26
Id. at 436.
27
Id. at 438.
28
Id.
29
Patricia Kilday Hart, Payday Lenders Continue Spending Spree
on Lobbyists, Hous. Chron. (May 2, 2013), http://blog.chron.com/
texaspolitics/2013/05/payday-lenders-continue-spending-spree-onlobbyists/.
30
Texans for Public Justice, Payday-Funded Pols Push Tepid Loan Reforms, Lobby Watch (Mar. 18, 2013), http://info.tpj.org/Lobby_Watch/
pdf/PayDay2013.pdf.
31
Id.
32
Forrest Wilder, How the Payday Loan Industry Works Regulators
from the Inside, Texas Observer (Jan. 8, 2014), http://www.texasobserver.org/how-texas-payday-loan-industry-works-regulators-inside/.
33
Senate Bill No. 1247, 83rd Legislative Session, found at http://
www.capitol.state.tx.us/tlodocs/83R/billtext/html/SB01247I.htm.
34
Forrest Wilder, A Last-Ditch Effort to Rein in Payday Loans, Texas
Observer (May 8, 2013), http://www.texasobserver.org/a-last-ditcheffort-to-rein-in-payday-loans/.
35
See, e.g., Editorial Board, Cities Are Picking Up the Fight Against
Payday Lenders, The Dallas Morning News (Apr. 10, 2014), available
at http://www.dallasnews.com/opinion/editorials/20140410-editorialcities-are-picking-up-the-fight-against-payday-lenders.ece.
36
Houston Code of Ordinances § 28, Art. XV.
37
Id. at Sec. 28.502.
38
Id.
39
Id.
40
Forrest Wilder, Houston Could Become Fifth Major Texas City to
Crack Down on Payday Loans, Texas Observer (Nov. 25, 2013), http://
www.texasobserver.org/houston-become-fifth-major-texas-city-crackpayday-loans/.
41
Id.
42
Corrie MacLaggan, Fight Over Payday Loans, From Capitol to
Campaign Trail, The Texas Tribune (Jan. 15, 2014), http://www.texastribune.org/2014/01/15/payday-lending/.
21
22
18
Journal of Consumer & Commercial Law