How payday lenders prey on the poor – and the courts aren’t helping

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McNulty wanted to go to court on behalf of Burke and tens of thousands of other payday victims, but she faced an unusually thorny challenge. The fine print of loan agreements prohibited recipients from participating in class actions. Of course, many companies try to protect themselves from these lawsuits, which they say can amount to extortion for minor sins. And by forcing each dispute to individual arbitration, companies can avoid many lawsuits in areas such as deceptive credit card offers or gender discrimination. “It’s like a jail-free release card for the company,” McNulty says. Part of the reason is that few poor or middle-class clients accept the offer to arbitrate a dispute. Rewards are usually capped and the amounts are too small to be worth the time or fees of an attorney.

But class actions can be a powerful tool for reform. And so, suing payday lenders under state’s unfair business practices and usury laws, McNulty challenged class action bans. She filed five class actions, one against each of the top five lenders still offering payday loans in North Carolina. State courts allowed cases to move forward, ruling that consumers were unaware that they were waiving their rights and that there were not enough lawyers willing to submit individual cases to arbitration. In early 2011, three lenders settled $ 37.5 million. The North Carolina attorney general shut down other payday lenders.

Getting rid of predatory lenders has been a victory for the citizens of North Carolina, but the broader issue of the right of businesses to limit the ability of clients to sue for bad practices has not been rectified. In April 2011, the Supreme Court ruled on a case similar to McNulty’s class action lawsuits, AT&T Mobility v. Concepcion, which was named in honor of the main plaintiffs, Vincent and Liza Concepcion, who signed a standard AT&T mobile phone contract that, at the printed fine, forced dissatisfied consumers to individual arbitration. Like in North Carolina, a lower court ruled that AT & T’s ban on class actions was unfair under California law. But Judge Antonin Scalia, writing for a 5-4 majority, cited a 1925 federal law, the Federal Arbitration Act, and overturned the decision. The text of the law was clear, Scalia said – it “was designed to promote arbitration,” and states could not oppose it. Judith Resnik, a professor at Yale Law School, told me that Scalia’s interpretation was “in no way consistent with what we know Congress was doing in 1925”. At the time, “arbitration was negotiated between traders, and not imposed by traders on their customers and employees.” Nonetheless, at least 139 class actions have been dismissed by the courts, according to the nonprofit group Public Citizen. Burke’s lawsuit, which was against one of the lenders that had not settled, was dismissed in February.

Andrew Pincus, a partner at Mayer Brown, who helped win the Concepcion case for AT&T, suggested that the availability of arbitration has a net economic benefit. Arbitration is cheaper, faster and more efficient for businesses and consumers alike. Either way, he said, it is the job of the CFPB to respond to “relatively few legitimate allegations of widespread inappropriate conduct.” And this is partly true. Since its creation in 2011, the CFPB has filed 40 lawsuits against deceptive practices in the financial sector, raising $ 3.1 billion for 9.6 million consumers. At the same time, the agency also recognized the importance of class actions, highlighting a series of recent cases in which 13 million consumers have received more than $ 350 million in payments and debt relief.


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