Executive Director for Public Justice, Paul Bland, says new rules being considered by the Consumer Financial Protection Bureau (CFPB) may turn the tables and once again allow consumers to use the power of a class-action suit to remedy unfair lending practices by some payday lenders.
A 2011 Supreme Court decision in the case of AT&T Mobility v. Concepcion shook the ground. By a margin of 5 to 4, the Supreme Court ruled that the Federal Arbitration Act of 1925 preempts state laws that say business contracts cannot prevent disgruntled consumers from pursuing businesses through class-action suits.
The Court’s decision described by one legal analyst as “a real game changer” essentially squashed class actions against quick-lending shops. The only option left for unhappy payday lender customers was to pursue individual arbitration cases.
However, it has become very apparent that the arbitration route has not been very successful, at least from the point of view of unhappy borrowers.
Arbitration doesn’t work
A study done by the CFPB found that less than seven percent of consumers actually pursue arbitration in cases where businesses require the dispute to be resolved in that manner. It means, according to the CFPB, that millions of dollars owed to consumers is essentially locked up without an appropriate resolution mechanism.
“If you file a class action against a payday lender alleging that a large group of people were misled, the lenders simply argue that they have an arbitration clause that means you cannot bring a class action,” says Bland. “The only thing they are allowed to do is go to individual arbitration, but almost no one goes that route and the cases just disappear.”
In March of this year, the CFPB, reviewing the issue of payday lenders, put a proposal forward that would ban the use of arbitration clauses.
“If that proposal becomes a new CFPB rule, it would be possible to bring class actions of this nature forward once again,” adds Bland.
Payday lender history/Pew studies
It has been said there are now as many payday lenders in the US as there are McDonald’s restaurants. That may or may not be true, but it is a fair comment on the proliferation of the quick cash shacks across the country.
Although quick cash loans have been around for a century, the last 15 years has seen an explosion in the number of strip mall lending stores.
The Pew Charitable Trusts, concerned about the effects on many Americans, has produced a number of studies on payday lenders. According to Pew, an estimated 12 million people use payday loans every year in the US. According to its research, payday borrowers spend an average of $520 in interest, rolling over an average of $375.
Each time the loan is rolled over there is a fee. Typically, in order to pay back the loan, borrowers must pay about a third of their paycheck, leaving them with insufficient funds to pay the rent, buy food, pay for transportation; and they end up borrowing again.
Other possible changes in the pipeline
There are some other CFPB possible rule changes that would benefit payday loan users according to Bland.
Lenders would have to give some consideration to a borrower’s ability to repay.
“The payday lenders extend loans to a huge number of people who aren’t able to pay,” he says. “That means they have to roll the loan over. That’s where they make their money. They don’t make it on the original fee. They make it off people who role the loans over again and again. There are people who role the loans over - literally dozens of times - and this sometimes translates to thousands of dollars. I have had clients who have rolled over as many as 20 times,” says Bland.
Another CFBP proposal would put a limit on the number of rollovers that a borrower can do.
“Under the CFPB proposal rules, the loan could be rolled over three times back to back,” he explains. “Meaning, if you take out a loan a third time, they can’t charge you another fee.
“And there would be a limit of three back-to-back loans and a maximum of six per year. If that does stand up, that will be disastrous for the payday loan business because they count on multiple renewals,” says Bland.
“I think there is a good chance we will see some change within six to 12 months,” adds Bland.
Paul Bland is the executive director of Public Justice in Washington D.C. As a staff and senior attorney, he was responsible for developing, handling and helping Public Justice’s cooperating attorneys litigate a diverse docket of public interest cases. Paul has argued and won more than 30 cases that led to reported decisions for consumers, employees or whistleblowers in six of the U.S. Courts of Appeals and the high courts of nine different states.