Senate Should Reject Choice Act And Its Payday Free Pass
By Steven Tindall and Shane Howarter
Law360, New York (July 12, 2017, 12:25 PM EDT) —
In this time of historically low interest rates (with 15-year mortgage rates still hovering around 3 percent), it may surprise you to learn that the poorest Americans often pay interest rates as high as 179 percent, 339 percent, or even 1,000 percent or more. Frequently, these borrowers are caught in a vicious cycle — taking out such loans simply to pay off a previous loan. A provision buried within the Financial Choice Act, passed by the U.S. House of Representatives last month, would limit federal regulators’ ability to protect consumers from abuses by the companies that provide such loans.
The Financial Choice Act was written and sponsored by U.S. Rep. Jeb Hensarling, R-Texas, who promoted the bill as a substitute for Dodd-Frank. The new legislation eases regulation on small community banks and credit unions, while purporting to still hold Wall Street and the big banks accountable. One of the signature achievements of Dodd-Frank was the creation of the Consumer Financial Protection Bureau, an independent regulatory agency that has proven politically controversial. Nonetheless, even critics like Hensarling admit that the CFPB “has an important mission” and “is capable of great good.”
Yet buried 400 pages into the nearly 600-page Financial Choice Act is a one-sentence provision that eliminates the CFPB’s ability to exercise “any rulemaking, enforcement, or other authority with respect to payday loans, vehicle title loans, or other similar loans.” The provision was slipped into the bill with little fanfare. But these few lines will no doubt greatly please the payday and title loan industry, which together made Hensarling the largest individual recipient of political donations from the $46 billion industry in the 2014 election cycle.
Setting aside the issue of money in politics — and any potential connection between industry donations and the inclusion of this provision — a key question is whether this provision is good public policy. The small-dollar loan industry has been thoroughly studied in the 20 or so years of its existence, and the numbers are in. The average payday borrower makes only $22,476 a year — more than $2,000 below the federal poverty level for a family of four — and nearly a quarter of such borrowers are on public assistance or are living on retirement income. Few people reading this article will have taken out a payday or similar small-dollar loan; the industry relies instead on the desperate and impoverished. Notably, the CFPB has found that 80 percent of payday loans are taken out within two weeks of repayment of a previous payday loan — meaning that the vast majority of these loans are taken out simply to repay a previous one.
The real kicker, though, is the interest rates on these loans. A 2013 CFPB study found that the average interest rate on payday loans is 339 percent annually. It’s rates like these that trap borrowers in the vicious cycle of taking out new loans to pay off the interest on previous ones. The staggering interest rates prompted John Oliver to feature payday loans on his HBO show, “Last Week Tonight with John Oliver.” Noting that the annual interest rates on these loans can be as high as 1,900 percent, Oliver quipped: “Nineteen hundred percent! Even the most demanding, abusive football coaches only ask for 110.”
Courts have recognized that interest rates on small-dollar loans can be abusive, and have struck down certain loans as unconscionable. Last year, the Delaware Court of Chancery was asked to examine a $200 loan with an annual interest rate of 838.45 percent. The terms of the loan called for the borrower to make 26 interest-only payments of $60 every two weeks, followed by a final payment comprising both $60 interest and the original principal of $200. The total repayments added up to $1,820, representing a cost of credit of $1,620 on the $200 loan. While acknowledging “the law’s broad support for freedom of contract,” the Chancery Court concluded that “[t]he economic terms of the Disputed Loan are so extreme as to suggest fundamental unfairness,” and “[o]n balance, the Loan Agreement is unconscionable.”
In a similar case, the New Mexico Supreme Court considered payday loans of $50-$300 with annual interest between 1,147 and 1,500 percent. The defendants opened payday lending operations in New Mexico in the early 2000s because, according to the company’s president, “there was no usury cap” there. New Mexico’s highest court struck back, however, unanimously holding 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.”
Our firm, along with Rukin Hyland LLP, the Sturdevant Law Firm, the Law Office of Arthur Levy, and the Law Offices of Damon Connolly, is currently litigating a related issue before the California Supreme Court in a case against CashCall Inc. The case involves the California Finance Lenders Law (FLL), which in effect caps annual interest rates at 19 percent on consumer loans up to $2,500 (though it allows interest rates of up to 30 percent for small loans). For consumer loans above $2,500, however, there is no stated cap. Defendant CashCall is a subprime lender that makes consumer installment loans to high-risk borrowers with poor credit histories and low credit scores. Its feature product is a $2,600 unsecured loan to be paid back over three years, with an annual interest rate that has risen over time, from 96 percent to 179 percent. CashCall has argued throughout the case that the lack of a stated cap under the FLL means that lenders like it are free to charge such rates on loans over $2,500.
The FLL, however, expressly incorporates the California Civil Code provision on unconscionability. The question before the California Supreme Court is essentially whether lenders such as CashCall may charge California consumers any interest rate they wish on loans over $2,500 that are intended to be paid over a period of time (three years or more, in this case), or whether exorbitant interest rates and other loan terms remain subject to California’s unconscionability statute. Plaintiffs have argued that the incorporation of unconscionability law in the FLL means the California Legislature expressly authorized the judiciary to adjudicate potentially unconscionable loans. Plaintiffs argue further that the absence of a stated cap for loans above $2,500 does not mean any interest rate would be lawful, because the Legislature explicitly assigned to the courts the duty of determining unconscionability. By contrast, CashCall’s position, if accepted and logically extended, would mean that under California law, lenders would be free to charge 96 percent, 179 percent, or even up to John Oliver’s 1,900 percent on loans of $2,500 or more.
Whatever your politics, it’s hard to argue that the current state of the small-dollar loan industry is the best it can be for consumers, who are caught in a cycle of debt that forces them to take out high-interest loans to pay off other high-interest loans. Indeed, 75 percent of Americans favor more regulation of payday loans rather than less. The Senate should take heed and reject the Financial Choice Act — or at least remove the payday loan provision, which would give these lenders a free pass from the CFPB. In the meantime, courts and the legal profession can and should protect the most financially vulnerable consumers by using existing law to rein in abusive and predatory loan practices.
DISCLOSURE: Tindall and Gibbs Law Group represent the plaintiffs in the CashCall case discussed here.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 Jeb Hensarling, Hensarling: Choice Act doesn’t give Big Banks a pass, Houston Chronicle (June 19, 2017), http://www.houstonchronicle.com/opinion/outlook/article/Hensarling-Choice-Act-doesn-t-give-Big-Banks-a-11231372.php.
 Financial Choice Act, H.R. 10, 115th Cong. § 733 (2017), available at https://www.congress.gov/115/bills/hr10/BILLS-115hr10rfs.pdf.
 See David Lazarus, Buried deep within GOP bill: a ‘free pass’ for payday and car-title lenders, L.A. Times (May 30, 2017), http://www.latimes.com/business/lazarus/la-fi-lazarus-choice-act-payday-loans-20170530-story.html; Jessica Silver-Greenberg, Consumer Protection Agency Seeks Limits on Payday Lenders, N.Y. Times (Feb. 8, 2015), https://dealbook.nytimes.com/2015/02/08/consumer-protection-agency-seeks-limits-on-payday-lenders/?_r=0.
 Payday Loans and Deposit Advance Products, CFPB (Apr. 24, 2013), at 18, available at http://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf.
 CFPB Data Point: Payday Lending, CFPB (Mar. 2014), at 4, available at http://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf.
 See Payday Loans, supra note 5, at 17.
 Predatory Lending: Last Week Tonight with John Oliver (HBO), YouTube (Aug. 10, 2014), https://www.youtube.com/watch?v=PDylgzybWAw.
 James v. Nat’l Fin. LLC, 132 A.3d 799 (Del. Ch. 2016).
 Id. at 812, 821, & 837.
 State ex rel. King v. B & B Inv. Group Inc., 329 P.3d 658 (N.M. 2014).
 Id. at 663.
 Id. at 676.
 De La Torre v. CashCall Inc., Case No. S241434.
 Cal. Fin. Code § 22303.
 Cal. Fin. Code § 22302.
 Payday Loan Facts and the CFPB’s Impact, PEW Charitable Trusts (Jan. 14, 2016), http://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2016/01/payday-loan-facts-and-the-cfpbs-impact.