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Federal Appeals Court Orders Reconsideration of Arbitration Referral

AARP Foundation Litigation attorneys represent a Pennsylvania borrower challenging usurious interest rates charged by a payday lender. A binding arbitration clause in the loan contract sharply limits the borrowers' ability to challenge the terms of the underlying loans.

Background


Raymond King took out two payday loans from Advance America, one for $500 and the other for $350, paying an effective annual percentage rate (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 $25,000.

The complaint also alleged that Advance America attempted to evade the state's lending laws through a relationship with BankWest of South Dakota, a national bank permitted to charge higher interest rates allowed under South Dakota law. This "rent-a-bank" scheme, according to the complaint, is insufficient to permit higher interest rates to be charged than those allowed by state law, because Advance America is the actual lender. Advance America sought to force the dispute into arbitration and to prevent it being heard as a class action.

The standard form loan contract King was required to sign provided that any disputes had to be submitted to binding arbitration. King's lawsuit, in which AARP attorneys are co-counsel, challenged the way in which the arbitration clause was imposed upon him, its terms, the bias that is inherent in the selection of the arbitrator and the unconscionable ban on class actions. Class actions often offer the only effective approach for challenging 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 had ruled that an arbitrator could decide whether the class action ban was enforceable. A federal appeals court has now ruled that the question of whether the arbitration clause's ban on class actions is valid must be made by a court, not an arbitrator. Under Third Circuit law, the court makes the initial determination of whether an arbitration clause is enforceable because it calls into question the validity of the arbitration clause itself. The case was remanded to the district court.

What's at Stake

This suit continues AARP's efforts to fight both predatory lending practices and forced arbitration. Court access is particularly important in cases like this, since payday lenders target low- and moderate-income people who have difficulty finding credit on reasonable terms. Consumers who cannot access mainstream sources of credit when they face a sudden need for cash are particularly vulnerable to lender overreaching. Lenders should not be able to limit the ability of these consumers to enforce state usury and other laws that limit interest rates on consumer loans by preventing them from going to court and requiring that they pursue claims in arbitration on an individual basis.

Status of the Case


King v. Advance America was remanded to the U.S. District Court for the Eastern District of Pennsylvania by the U.S. Court of Appeals for the Third Circuit.