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Judges Will Decide When Interest Rates On Payday Loans Become Excessive
July 1st, 2011
The case marks the first time Wisconsin courts have faced the question
The 4th District Court of Appeals said the consumer act is unclear on whether a judge can determine if an interest rate is excessive. However, the Supreme Court is best suited to make a ruling since any decision will have a statewide impact on consumer credit transactions, the appeals court said.
The case
The case stems from a series of loans Jesica Mount of Onalaska secured from Payday Loan Stores of Wisconsin Inc. during the last quarter of 2008. According to court documents, annual interest rates on the loans varied from 446 percent to 1,338 percent. The loan company filed a small claims lawsuit against Mount in December 2009 after she failed to make her payments. Mount filed a counterclaim alleging the loans violated the Wisconsin Consumer Act because the interest rates were unreasonable. La Crosse County Circuit Judge Ramona Gonzalez agreed with Mount and granted her summary judgment.
The appeal
The loan company contends on appeal that a judge can’t find a particular interest rate is excessive because the consumer act expressly permits any rate or charge. The company goes on to argue that the Legislature, not judges, should determine what interest rates are too high. If judges start making those decisions, their rulings will vary and lenders won’t know what interest rates are acceptable, the company maintains.
The consumer act
Mount, however, has countered that the consumer act is designed to protect people from unfair, deceptive and misleading business practices and must be construed liberally. A lack of a rate cap doesn’t mean a rate of more than 1,000 percent isn’t excessive, she adds. “Guidance from the Supreme Court on both these topics will benefit consumer law practitioners and the lower courts,” the appeals court wrote.
Certification
Four of the Supreme Court’s seven justices must vote to take a case on certification from a lower court. Supreme Court spokesman Tom Sheehan said in a statement the court will take the time it needs to gather information and make a decision.
Wisconsin
Former Gov. Jim Doyle, a Democrat, signed a law last year that imposed the first regulations on the burgeoning payday loan industry in Wisconsin after months of fierce debate. The measure limits loans to $1,500 or 35 percent of an applicant’s monthly income, whichever is less and prohibits loan stores within 1,500 feet of each other or 150 feet of residential areas. The measure also banned auto title loans, but didn’t address interest rates.
Capping the interest
The new state budget set to take effect Friday lifts the ban on auto title loans. Rep. Evan Wynn, R-Whitewater, has written a bill that would cap payday loan interest at 36 percent. That measure has bipartisan support in both the Assembly and Senate, but it hasn’t moved out of the Assembly Financial Institutions Committee. Curt David, an aide to committee chairman Rep. Bill Kramer, R-Waukesha, said the bill may come up for consideration this fall, although it might make more sense to wait for the Supreme Court to rule in Mount’s case.
Something must be done.
“They’re preying on people who are in hard financial circumstances,” said Wynn. “For people who need payday loans, they’re the ones living paycheck to paycheck. They’re under a lot of stress. They don’t read all the fine print. They take these things and it winds up like this lady from Onalaska where she pays 1,000 percent.”
Credit Unions Moving into Payday Loan Territory
May 29th, 2011
Short-term loans at prices far higher than they are permitted to charge for any other product.
The credit unions are the financial equivalent of a trusted uncle, dispensing prudent loans for cars, homes, and education without the profit motive of traditional banks to millions of customers.
High interest rates
Encouraged by federal regulators, an increasing number of credit unions are competing directly with traditional payday lenders, selling small, short-term loans at prices far higher than they are permitted to charge for any other product.
Interest rate raised
This past September, the National Credit Union Administration raised the annual interest rate cap to 28 percent from 18 percent for credit unions that offer payday loans that follow certain guidelines. Under this voluntary program, credit unions must allow at least one month to repay, and cannot make more than three of these loans to a single borrower in a six-month period. But because these firms can charge a $20 application fee for each new loan, the cost to borrow $200 for two months translates into an annual rate of more than 100 percent.
Outside the federal program
“We spent a long time trying to do this in a way that would work for members and for the credit unions and not be predatory,” said NCUA Chairman Debbie Matz. What’s more, many credit unions prefer to sell loans outside the federal program, allowing them to charge customers significantly more to borrow.
Mountain America
At Mountain America Federal Credit Union in Utah, a five-day $100 “MyInstaCash” loan costs $12, which works out to an 876 percent annual interest rate. An iWatch News investigation found 15 credit unions like Mountain America offering high-cost loans that closely resemble traditional payday loans. “They are promoting these loans as payday alternatives, but they are not really alternatives, they are egregious payday products,” said Linda Hilton, a community activist in Salt Lake City. “We look at it as a moral lapse of credit unions.”
Credit unions
In total, more than 500 federally insured credit unions are making payday loans in an industry struggling to remake itself after the financial crisis of 2008-09. Rates for the short-term loans vary widely from the high triple-digit rate loans sold by Mountain America to a modest 12 percent interest rate with no fees at State Employees Credit Union in North Carolina.
Warning
Consumer groups typically warn against borrowing at interest rates higher than 36 percent per year. That’s the maximum allowed by many states and by the Pentagon for loans to active-duty members of the military. The push into payday lending comes at a time when some credit unions are facing questions about their financial viability. Credit unions operate as not-for-profits and can’t raise investor capital like banks when times are lean. The NCUA has designated about 7 percent of about 4,600 credit unions as either a serious supervisory concern or at high risk of failure.
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