Friday, April 18, 2014

Still the best way to rip off the poors


Payday lenders reap a usurious reward for their efforts, despite occasional attempts to rein in their slimy practices. And thanks to Republican efforts to push federal judges to the right, the courts aren't much help when people get fleeced.
In 2003, Tonya Burke was living in North Carolina with her two children when she got into financial trouble. She had fallen $500 behind on her rent and utilities, and neither of her boys’ fathers was able to chip in. Then she needed to take time off from work when her younger son, who was only 8 months old, had to have emergency intestinal surgery. After his recovery, she started working for $11 an hour as a secretary, “but my paychecks weren’t enough to cover the back bills and the new ones too,” she says. “I was at a point in my life where I didn’t want to ask anyone else for help.” There was a payday lender across the street from her office. “It seemed like a good solution.”

Even though North Carolina made payday lending illegal in 2001, five lenders got around the law by affiliating with out-of-state banks to offer short-term, high-interest loans. So Burke was able to walk into a storefront owned by Nationwide Budget Finance and leave with a cashier’s check for $600. When the loan came due on her next payday, however, she couldn’t pay it and immediately began to fall behind on the fees. So she took out another loan to cover the first one. And then took out another to cover that one — and then another and another. Eventually she wound up with seven loans, each for only hundreds of dollars, but with annual interest rates of 300 to 500 percent. It wasn’t long before the lenders started calling, she says, threatening with jail if she couldn’t make her payments.

Worried for herself and her children, Burke eventually found her way to Carlene McNulty, a consumer rights lawyer at the North Carolina Justice Center. McNulty had heard about many cases of people who found themselves buried under the fees of payday loans. “Our Legislature said: ‘Payday lending is harmful to consumers. Get out of North Carolina!’ ” she told me. “But they were still here, just as if the law had never changed.”

Payday loans are often advertised as a short-term lift that helps keep the lights on or allows you to stay in school. But borrowers often become trapped in a debt spiral. According to a new report from the Consumer Financial Protection Bureau, the government’s financial watchdog, about 50 percent of initial payday loans play out into a string of 10 or more. “One could readily conclude that the business model of the payday industry depends on people becoming stuck in these loans for the long term,” the C.F.P.B.’s report said.

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 on the loan agreements barred recipients from participating in class-action suits. Of course, many businesses try to protect themselves from these suits, which they argue can amount to extortion for minor sins. And by forcing every dispute into individual arbitration, companies can avoid many lawsuits in areas like misleading credit-card offers or sex discrimination. “It’s like a get-out-of-jail-free card for the company,” McNulty says. In part, this is because few poor or middle-class customers take up the offer to arbitrate a dispute. The awards are generally capped, and the amounts are too low to make it worth a lawyer’s time or fee.

But class-action lawsuits can be a powerful tool for reform. And so, suing the payday lenders under the state’s unfair-trade-practice and usury laws, McNulty challenged the class-action bans. She proceeded with five class-action cases, one against each of five major lenders still offering payday loans in North Carolina. The state courts allowed the cases to go forward, ruling that consumers weren’t aware that they were signing away their rights and that there weren’t enough lawyers willing to take individual cases to arbitration. By early 2011, three lenders settled for $37.5 million. The North Carolina attorney general shut down the remaining payday lenders.
So North Carolina succeeded where others have failed or failed to act. But thanks to Supreme Court ruling written by Justice "Fat Tony" Scalia that twists the intent of the law, poor people are more likely to be screwed by arbitration. And so it goes, on and on.

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