Consumer Law & Policy Blog

Court Turns Down New Jersey Rent-to-Own Challenge

by Deepak Gupta

On Monday, the Supreme Court turned down a request by former Solicitor General Ted Olson to hear a challenge to New Jersey's consumer protection and usury laws filed by the nation's largest "rent-to-own" company, Rent-A-Center, which operates 43 such stores in New Jersey.  (06-657, Rent-A-Center v. Perez).   

The Supreme Court's order leaves in place an important victory for consumers.  In an opinion you can access here, the New Jersey Supreme Court had ruled last year that Rent-A-Center is subject to a 30% annual interest-rate cap that applies to other retailers who allow customers to pay for their purchases in installments.   Specifically, the Court held that (1) rent-to-own transactions are "installment sales" within the meaning of the state's Retail Installment Sales Act and (2) the interest-rate limitations of the state's criminal usury laws apply to such transactions.  (You can listen to the oral argument here.  For some background on "rent-to-own" and how it harms low-income consumers, visit this page at U.S. PIRG's website.)

The question in Ted Olson's petition was whether the New Jersey court's decision to apply those holdings to a pending class action against Rent-A-Center was an impermissible retroactive ruling that violated Rent-A-Center's right to constitutional due process.   As is so often the case in cert-stage proceedings, however, the killer arguments in the brief in opposition had less to do with the merits of Olson's creative constitutional argument than with jurisdictional niceties and the procedural posture of the case.   Because the case was coming from a state court, it would have to meet the finality requirement of 28 U.S.C. 1257(a), the statute that allows the Court to review state-court judgments.  But the New Jersey court's decision was interlocutory and none of the established exceptions to the finality rule applied, and accordingly, the Supreme Court lacked jurisdiction.  And because Ted Olson's federal constitutional due process theory hadn't even been raised in the New Jersey courts, Rent-A-Center had waived the issue it was asking the Court to decide.

Update: The same constitutional retroactivity argument has also been raised in the pending cert petition in 06-907, County Bank of Rehoboth Beach, Del v. Muhammad.  In Muhammad -- as Mike Quirk discussed in this previous post -- the New Jersey Supreme Court held that a class arbitration ban in an adhesive consumer contract for high-interest payday loans was unconscionable under state law.

Times Takes a Look at Payday Lending

Today's New York Times has an article on payday lending, "Seductively Easy, Payday Loans Often Snowball." The piece focuses on Gallup, New Mexico, a town with a population of 22,000 that has over 40 storefront payday lending outfits, many of whose clientelle are Navajo or Hispanic. Although the Times presents the industry's spin and uses the term 'predatory lending' in scare quotes, the overall picture is one of an industry run amok at the expense of the most vulnerable consumers.

Payday lending is a hot topic around the country right now. Here are some other interesting articles from past few days: An piece in the Virginian-Times Pilot discusses North Carolina's successful efforts to combat payday lending, including providing low-cost alternatives: Will Virginia adopt North Carolina's example? In Arkansas, this article reports, legislators have introduced a bill to curb payday lending because the state supreme court hasn't enforced the state constitution's usury cap. And in Oregon, the industry has found ways to get around recent anti-payday-lending laws. (For more information, see this page at Center for Responsible Lending's website.)

Consumer Groups File Amicus Brief in Important National Bank Act Preemption Case

     The National Consumer Law Center, the Consumer Federation of America, the Center for Responsible Lending, AARP, Consumers Union, the National Association of Consumer Advocates, Public Citizen, and other consumer groups have filed an amicus brief in an important preemption case pending before the U.S. Court of Appeals for the Second Circuit.  Pacific Capital Bank v. Connecticut, No. 06-4149cv, presents the question whether the states may regulate loan brokers who market tax refund anticipation loans (RALs) to low-income consumers, or, rather, as the district court held, such state regulation is preempted by the National Bank Act.  The brief, written principally by NCLC's Chi Chi Wu, explains that National Bank Act preemption does not apply to non-bank entities, such as loan brokers.

Consumer Law Classic: Testimony of a Predatory Lender

by Jeff Sovern

Though many of the postings on this blog concern breaking developments, sometimes it's uesful to bring to light something that, even though not a new development, may not be well known and still bears on an issue of today.  In that spirit, let me call your attention to the testimony of "Jim Dough," (the pseudonym of a self-described former employee of a finance company) taken during a hearing before the Senate Special Committee on Aging on March 16, 1998, titled “Equity Predators: Stripping, Flipping and Packing Their Way to Profits.”  The testimony helps explain how predatory lenders persuade consumers to agree to terms that are not in their best interests.  Unfortunately, the link connects only to the prepared testimony, and interesting points were also made during "Mr. Dough's" discussion with Senator Breux.  For that reason, and fot those who don't want to read the entire statement, I'm going to paste in here some of the highlights of the testimony, drawn from both the prepared statement and the colloquoy:

Finance companies try to do business with blue-collar workers, people who haven't gone to college, older people who are on fixed incomes, non English-speaking people and people who have significant equity in their homes. In fact, my perfect customer would be an uneducated widow who is on a fixed income -- hopefully from her deceased husband's pension and social security -- who has her house paid off, is living off of credit cards, but having a difficult time keeping up her payments, and who must make a car payment in addition to her credit card payments.

* * * [W]e were trained to sell the monthly "savings," that is, how much less per month the customer would be paying if we flipped the loan. In reality, the "savings" that we were trained to sell to customers were just an illusion. The uneducated customer would jump for the "savings," thinking that he would have more money to buy other things.

Thoughts on the Preemption Arguments from Around the Blogosphere

In today's Washington Post, Tomoeh Tse has a report on yesterday's oral arguments in the Watters v. Wachovia predatory lending preemption case.  A snippet:

[Chief Justice] Roberts said it seemed that banks wanted to be viewed as federally governed on regulation issues but state-based to shelter themselves from liability issues. "You are really trying to have your cake and eat it too," he said.

Justice John Paul Stevens questioned whether the OCC had the manpower to handle the increased responsibility it took when it preempted state law in 2001. He asked specifically how many additional investigators the OCC had hired when it took over this responsibility.

"Well, I don't have an empirical answer to that question," said Sri Srinivasan, assistant to the solicitor general of the Justice Department.

James Rosen, reporting for the McClatchy newspapers, boils the whole thing down this way:

Justices Anthony Kennedy, David Souter and Stephen Breyer seemed most receptive to Wachovia's arguments, while Justices Roberts, John Paul Stevens and Ruth Bader Ginsburg appeared to lean toward Michigan's claims. Justice Antonin Scalia grilled both sides relentlessly. Justice Clarence Thomas had recused himself from the case and didn't participate.

While justices' questions don't always predict their eventual rulings, several appeared to tip their hands in the Wachovia case.

"This is just a standard (federal) pre-emption case," Kennedy said in apparent agreement with the bank.

The Wall Street Journal, in an article titled "The Power to Destroy," suggests that the question in the case goes all the way back to McCulloch v. Maryland.  The Bank Lawyer's Blog tries to read the tea leaves based on yesterday's argument.  Ideoblog discusses the possible implications of Watters for securities law.

Via C-SPAN, you can a watch a video of the American Enterprise Institute panel on the case.  The panel featured George Mason University law professor Todd Zywicki, a member of a group of economists, scholars, and law professors who filed an amicus brief; Columbia law professor Thomas W. Merrill, who represents the Center for State Enforcement of Antitrust and Consumer Protection Laws as amicus in this case; attorney Amy Quester, who represents the Center for Responsible Lending as amicus in this case; and O’Melveny & Myers LLP partner Brian Brooks, an attorney who represents banks in class action defenses in court. Ted Frank, director of AEI’s Liability Project, moderated.

Senator Dodd on Credit Cards

by Jeff Sovern

  Today's New York Times has an interesting article about Senator Dodd, the incoming chair of the Senate Banking Committee.  Here's a quote:  "At a hearing this year, [Senator Dodd] said that credit cards increasingly were little more than 'pocket-sized predatory loans' and that he has proposed legislation that would curtail the ability of the companies to market credit cards to students who were not able to afford debt."   I can't remeber seeing credit cards compared to predatory loans before. 

Sen. Tim Johnson (D-Citibank) Wants to Roll Back Landmark Law on Predatory Lending to Military Servicemembers

by Ira Rheingold

While many in the consumer advocacy community are excited about the recent change to leadership in Congress, we need to recognize that oftentimes there is not a dime’s (make that a corporate millions) bit of difference between Democrats and Republicans when it comes to the issues we care about.  Just check out these quotes, about the great legislation on predatory lending to the military (the Talent-Nelson amendment) that was passed just this October, from a leading Democrat on the Senate Banking Committee in Wednesday’s American Banker:

Sen. Tim Johnson said in an interview that a top priority is the military lending measure, which caps at 36% the annual percentage rate, including fees, that can be charged to service members and their dependents. The South Dakota Democrat warned that the provision--intended to curb payday lending--may interfere with the credit system.

The measure "may have a lot of unintended consequences that will go far beyond just the payday industry," he said. "We are going to have to revisit that issue and make sure that the end result of this legislation isn't to deny military members and their families access to banking services that they've always assumed would be there."

Not So Cute Anymore

by Christopher Peterson

Gary Coleman endeared himself to Americans as a child actor staring in the 80's sitcom "Different Strokes". His cherubic face and affably excitable character reliably delivered punch lines, including especially his signature catchphrase "Whatchoo talkin' 'bout, Willis?"  When his television show ended, Coleman found that his parents and manager had mismanaged his multi-million dollar trust fund, eventually leaving him penniless.

I always felt sympathy for the actor, who suffers from a congenital kidney disease, as he tried to break out of his childhood typecasting and find a satisfying path in life. Still, it raised my eyebrows when I learned that Mr. Coleman had accepted a job as a spokesperson for Cash Call, Inc., a California based finance company that makes high-interest, unsecured loans to consumers in California, Idaho, Nevada, New Mexico, and Utah. In most other states Cash Call also acts as a solicitation agent for First Bank & Trust, Milbank, South Dakota.

This three-way relationship brought a couple of thoughts to mind:

First, lenders have a tendency to focus on economics when they talk about public policy. Discussions of usury law, disclosure law, and bankruptcy seem to inexorably turn to concepts like opportunity costs, Pareto optimal outcomes, and regulatory distortion. The intellectual contributions of behavioral economists are generally scorned or minimized. But lenders do seem to rely on psychology when they talk to their customers. Mr. Coleman is valuable to Cash Call and First Bank & Trust because of his notoriety. It is not as though loans from by a firm endorsed by Gary Coleman are better or cheaper loans. Rather they employ him because he is salient in the minds of millions of people who watched him on television back in the good-ole’ days. Mr. Coleman reminds us that things don’t always work out, and that even former TV super-stars do not need to feel bad about borrowing money from a shady company like Cash Call now and then. (Go to ripoffreport.com and search under "Cash Call" for a long list of upset customers, including this one or this one.) Mr. Coleman is an ideal spokesman for a company that wishes its customers to lower their guard. After all, who wouldn’t trust cuddly, little "Arnold" from TV?

A second point. In an essay forthcoming in the American Law Review, I question the wisdom of granting federal preemption to agents of chartered depository institutions. According to the Office of the Comptroller of the Currency and the Office of Thrift Supervision, independent agents of national banks and thrifts should be regarded as beyond the regulatory and legislative oversight of state governments. The FDIC is considering an attempt to grant similar powers to state banks, such as First Bank & Trust, Milbank, South Dakota. Federal regulators have explained that state governments should not be allowed to regulate national banks and thrifts simply because the financial institutions chose to deliver services through an agent. But as Cash Call’s relationship with First Bank & Trust demonstrates, non-depository agents will always tend to have less incentive to forego predatory behavior than a depository institution with closer oversight, greater capital requirements, and relatively greater investment in reputational capital. If First Bank & Trust wants to use Gary Coleman to peddle their high-interest loans, shouldn’t they be required to hire him directly, rather than hiding behind an agent?

In the end perhaps Mr. Coleman still deserves our empathy. I suspect he is being used yet again.

Consumer Debt, the Military, and Iraq

by Deepak Gupta

What could the increasing level of consumer indebtedness in the United States possibly have to do with the security situation in Iraq?

Well, according to a disturbing new Associated Press report, "Thousands of U.S. troops are being barred from overseas duty because they are so deep in debt they are considered security risks."

The number of troops held back has climbed dramatically in the past few years. And while they appear to represent a very small percentage of all U.S. military personnel, the increase is occurring at a time when the armed forces are stretched thin by the wars in Iraq and Afghanistan . . .

The Pentagon contends financial problems can distract personnel from their duties or make them vulnerable to bribery and treason. As a result, those who fall heavily into debt can be stripped of the security clearances they need to go overseas.

While the number of revoked clearances has surged since the beginning of the Iraq war, military officials say there is no evidence that service members are deliberately running up debts to stay out of harm's way . . .

The problem is attributed to a lack of financial smarts among recruits; reckless spending among those exhilarated to make it home alive from a tour of duty; and the profusion of "payday lenders" — businesses that allow military personnel to borrow against their next paycheck at extremely high interest rates.

Predatory Lender Gets Ten Years in the Clink

by Christopher Peterson

Will the possibility of ten years in a state prison deter payday lenders from circumventing consumer protection laws? I guess we'll find out. Last August Assistant State Attorney Russ Edgar from Pensacola, Florida obtained a guilty verdict in a state "little RICO" Act prosecution of a notorious payday lender. The trial court recently finished the sentencing phase of the trial, giving John Gill, Jr. ten years in the clink. Read the story here.

Mr. Gill operated strip-mall loan outlets in several states around the country, usually without obtaining a license or even attempting to comply with state lending laws. His companies disguised payday loans as purchases of internet services or catalogue certificates combined with a "rebate." In a typical transaction, a consumer would receive $600.00 in cash (the "rebate") and be obligated to pay $100.00 every two weeks for an entire year. The consumer would also have the right to schedule appointments to use a computer at the store location to access the Internet for up to ten hours every two weeks. At one point Mr. Gil did obtain a license to legally lend within Florida's industry-drafted statute (which currently allows payday lending at interest rates of around 390%). But, he apparently found the regulations to onerous, instead opting to turn in his license and lend illegally.

 

To me, the case is an interesting example of the Bentham's old argument about interest rate caps creating a black market. Florida has (roughly speaking) a 390% per annum cap, but some lenders still refuse to comply. Is this an indictment of usury law as a policy strategy? Or, does it tend to show that market imperfections prevent the short-term, high-cost consumer debt market from resolving to Pareto optimal pricing? I suspect that it is both. Neither usury law, nor markets are adequate policymaking tools. But, given a choice between the two, I think mandating and attempting to enforce a reasonable upper limit on credit prices is better for society in the long run.