Legal Advocacy
AARP Asks Florida Court to Let Borrowers File Joint Claims Against Payday Lender
AARP filed a “friend of the court” brief urging a Florida appeals court to rule that arbitration clauses in payday lending contracts cannot be enforced if they prohibit borrowers from bringing class actions. This is the latest twist in a series of cases that have been before the Florida courts for several years. In one of those cases, the Florida Supreme Court ruled (as AARP had urged) that payday loans made before 2001 were covered by the state usury law’s interest rate cap. That ruling was important because in 2001 the state legislature amended the Money Transmitters Code to allow payday loans with certain restrictions. The court rejected the lenders’ argument that their activities were governed by a prior version of the Code, not the usury law, finding instead that the 2001 amendments covered payday loans for the first time and that the loans made before that were covered by, and violated, the usury law.
The current case is a class action filed on behalf of another group of payday borrowers who alleged violations of several state consumer protection laws. The lenders asked the trial court to force the borrowers to pursue their claims on an individual basis in arbitration based on a clause that required arbitration and banned class actions. A trial court refused to enforce the clause, finding the class action ban violated Florida public policy by making it virtually impossible for borrowers to pursue their claims. It thus defeated the state statutes’ remedial and deterrent purposes. The lenders appealed.
The dispute
Payday loans are one of the most common forms of “fringe banking” transactions, marketed to low- and moderate-income consumers, those on fixed incomes, including people dependent on Social Security benefits, those with blemished credit histories, and others who cannot get loans from mainstream lenders. They are short-term loans of relatively small amounts of money, usually $100 to $500, in which the borrower writes a personal check payable to the lender and receives cash minus a fee. The lender knows the borrower does not have sufficient funds to cover the check and agrees to hold it until the borrower's next payday or another agreed upon date.
At the end of the loan term -- usually one or two weeks -- the consumer can allow the lender to deposit the check, can redeem the check by paying its full face value, or "roll over" or extend the loan by paying another fee without receiving additional cash. Studies repeatedly show that a large proportion of payday borrowers cannot repay the loan when it is due and roll over their loans many times. They end up paying fees far in excess of the original amount borrowed. Annual percentage rates (APRs) on these loans typically range from around 390% to 500%, though some exceed 1000%.
Borrowers have difficulty going to court to challenge these loans as violating state usury caps and other lending and consumer protection laws because lenders typically include clauses, buried in the language of the contract, requiring that all borrower disputes be resolved in arbitration, not court. Making matters worse, most arbitration clauses in these contracts include class action bans, which not only prevent borrowers from going to court but also require that they bring their cases in arbitration on an individual basis and not join together, even when the have identical claims against the same lender. That type of ban is at issue in McKenzie Check Advance of Florida v. Betts.
Class actions often are the only effective way to stop corporate wrongdoing and obtain relief for victims, especially when their claims are relatively small and it is not economically feasible for them to bring a case, either in court or in arbitration (in fact, it often is more expensive for a consumer to bring a case in arbitration than it would be to file a court case). Fortunately for consumers, as the number and type of companies to use arbitration clauses has expanded (e.g., cell phones, credit cards, nursing homes), and they increasingly include class action bans in these clauses, a growing number of courts around the country have invalidated these bans, particularly when they have the effect of preventing consumers and others from seeking relief and thus exculpating companies from liability.
As the trial court stated in refusing to enforce the lender’s class action ban in this case, the laws under which the borrowers sued were intended to regulate actions for the public good and thus were remedial in nature. Remedial statutes “do not exist solely for the benefit of individual parties, and are instead designed to afford a broader protection to the citizens of Florida.” Such statutes “depend on injured consumers acting as private attorneys general in the face of scarce public resources.” The court recognized that companies doing business in Florida “should not be permitted to avoid the impact of Florida’s consumer protection laws by incorporating terms into contracts that effectively abrogate any responsibility to follow them.” The court refused to enforce the ban where “no other reasonable avenue for relief is present. Enforcement of the class action waiver would defeat the implicated statutes’ remedial purposes and undercut their deterrent value.”
AARP’s brief
AARP’s “friend of the court” brief filed by AARP Foundation Litigation attorneys details the importance of class actions, particularly when state attorneys general are overwhelmed with competing priorities and have insufficient funds to prosecute all corporate wrongdoings; when victims of fraud and unfair and deceptive practices are too poor or marginalized to be able to enforce their rights on an individual basis; and when the individual harm may be too small to justify a victim’s time and expense to bring an individual lawsuit but the relatively small amounts add up to enormous corporate profits. The brief also details the numerous federal and state courts that have refused to enforce class action bans in arbitration clauses because they are unconscionable or against public policy.
Because payday lenders target low- and moderate-income consumers on fixed incomes (such as Social Security) and because people turn to fringe banking when faced with unexpected crises such as unanticipated health issues, protecting the rights of these borrowers is particularly important to AARP. In fact, AARP Florida had opposed enactment of the 2001 statutory amendments that allowed payday lending in the state because they did not include stronger consumer protections. It is important to make sure these borrowers and other consumers can seek redress when they are harmed by corporate wrongdoing and also stop the unlawful practices. As the trial court recognized, companies should not be allowed to use unfair contract terms to avoid scrutiny of their practices and liability for the harm they cause.
Contact person:Deborah Zuckerman
duckerman@aarp.org
(202) 434-2060
May 13, 2008