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Court Deals a Blow to Consumers

AARP Foundation Litigation attorneys represented a Pennsylvania borrower who challenged usurious interest rates charged by a payday lender. The trial court ruled that the claims must be arbitrated individually because of a binding arbitration clause in the loan contract, which sharply limits the borrowers’ ability to challenge the terms of the underlying loans.


Raymond King took out two payday loans from Advance America, one for $500 and the other for $350, paying an effective APR of 770 percent on the first and 533 percent on the second, well in excess of Pennsylvania’s usury limit. King sued Advance America on behalf of himself and other similarly situated borrowers, alleging violations of state lending law. The complaint stated that Advance America failed to register for an exemption that would have permitted it to charge 24 percent APR for loans under $25K.

The class action complaint also alleged that Advance America attempted to evade the state’s lending laws through a sham relationship with a national bank, BankWest of South Dakota, which is permitted to charge higher interest rates allowed under S.D. law. This “rent-a-bank” scheme, according to the complaint, is insufficient to permit Advance America, the actual lender, to charge higher interest rates than those allowed by state law. The Pennsylvania attorney general, in separate proceedings, invalidated the rent-a-bank scheme, but did not remedy injuries to the consumers who were charged usurious interest. Advance America sought to force the consumer’s dispute into arbitration and to prevent it being heard as a class action.

When King took out his loans, he was required to sign a standard form contract that provided all disputes had to be submitted to binding arbitration. King’s lawsuit, in which AARP Foundation Litigation attorneys served as co-counsel, challenged the way in which the arbitration clause was imposed upon him, its terms, the bias inherent in the selection of the arbitrator, and the unconscionable ban on class actions. Class actions often offer the only effective means to challenge a corporate-wide policy. King argued that the class action ban makes it virtually impossible for people like him, with relatively small claims, to seek relief because it is too expensive to challenge practices on an individual basis.  

The lower court initially ruled that an arbitrator could decide whether the class action ban was enforceable. A federal appeals court overturned that decision, finding that the question of whether the arbitration clause’s ban on class actions is valid must be made by a court, not an arbitrator. After the appeals court overturned the trial court, the U.S. Supreme Court ruled in AT&T v. Concepcion that an arbitration clause must be enforced even if it prevents a class action proceeding. The trial court thereupon granted Advance America’s motion to compel arbitration on an individual basis.

What’s at Stake

AARP is continuing to fight predatory lending practices and forced arbitration, which severely limits consumer access to relief when lenders and corporations overreach. Payday lenders target low- and moderate-income people who have difficulty finding credit on sustainable terms, trapping them in a downward spiral of debt that further exacerbates their financial difficulties. The ubiquitous use of forced arbitration clauses and limitations on class action proceedings eliminates a vital legal tool that protects consumers from such practices.

Case Status

King v. Advance America was remanded by to the U.S. District Court for the Eastern District of Penn. by the U.S. Court of Appeals for the Third Circuit. The district court then sent the dispute to arbitration on an individual basis.