Criticism of payday loans generally focuses on the astronomically high interest rates and the lenders’ sales tactics. For example, the annual interest rates for the loans at the center of the case we have been discussing worked out to 139 percent. Many payday lenders will lure borrowers into multiple short-term commitments, granting loan after loan, turning a financial emergency into a financial disaster. It looks like a helping hand at first, but the lender is poised to kick the borrower when he’s down.

As you may recall, the case at hand is from the 7th U.S. Circuit Court of Appeals and involves an out-of-state payday lender and three Illinois plaintiffs. The plaintiffs had signed loan agreements that included an interesting provision.

The contract required that disputes be resolved by arbitration — by itself, not unreasonable — and that the arbitration would “be conducted by the Cheyenne River Sioux Tribal Nation by an authorized representative in accordance with its consumer dispute rules and the terms of this Agreement.” Generally, a provision like this would be reasonable.

The problem for the court with this particular requirement? The tribal government has no mechanisms or rules in place to arbitrate any dispute, much less one between this lender and a borrower. Nor does the tribe have consumer dispute rules in place. The requirement in the contract, then, is unenforceable — “a sham and an illusion,” the court said.

The plaintiffs have asked for restitution, among other things. They have also asked the court to issue an injunction that would stop the defendant lenders from operating in Illinois. Those matters will be decided by a lower court on remand.

The plaintiffs wanted this to be a class action. They maintained that more than 100 people in the state had fallen victim to this lender’s abusive practices. The plaintiffs and the others have options for debt relief that are both fair and legal.

Source: The Cook County Record, “Seventh Circuit revives class action suit over payday loans; calls arbitration clause ‘unconscionable’ and process ‘a sham,’” Jonathan Bilyk, Aug. 25, 2014