The payday loan industry sometimes seems impervious to corrective action. These are the companies, Internet-based for the most part, that give individuals who are in dire financial straits a quick infusion of cash. The borrowers agree to pay the loan back in a few weeks for what seems like a modest interest rate. The problem is that the interest rates are not moderate — annualized, they can exceed 100 percent — and the lender continues to offer “incentives” for the borrower to take out loan after loan after loan. The result can be a total financial meltdown.
Every so often, the Federal Trade Commission or the courts are able to catch a payday lender engaging in illegal or unscrupulous dealings with borrowers. In one recent case, the 7th U.S. Circuit Court of Appeals ruled against the lender in a class action lawsuit filed by three Illinois borrowers. In this case, it was not the lending process itself or the three-digit interest rates that were at issue. Rather, it was a dispute resolution clause in the loan agreement.
Contracts sometimes include a clause that requires the parties to resolve disputes through arbitration (binding or non-binding). In some cases, the parties agree that arbitration will be the first step, but, if no agreement results, the parties are free to pursue a resolution in court. The payday loan agreement required arbitration.
Contracts generally have a “choice of law” clause, too. The choice refers to which state law the parties will follow if there is a dispute. Remember, contracts are governed by state law, and the laws may vary from state to state.
While this choice of law provision may sound like a picky thing, it can make an enormous difference to the parties. For example, Illinois has a five year statute of limitations for a breach of contract lawsuit, but Wisconsin’s statute of limitations for the same issue is six years. Or, some states cap damage awards while their neighboring states do not.
The loan agreement had a particularly unusual choice of law clause, based on the owner’s affiliation with the Cheyenne River Sioux Tribe.
We’ll continue this in our next post.
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