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Consumer Credit Regulation: 7.2.1.1 Introduction

Usury is a statutory offense rather than an infraction of common law, and principles of statutory construction come into play in the many cases where the controlling usury statutes are vague or ambiguous. Unfortunately, the misunderstood history of usury has created confusion as to how one important principle of statutory construction applies—that statutes in derogation of common law are to be strictly construed.

Consumer Credit Regulation: 7.2.1.2 Invoking the History and Purpose of Usury Statutes

The fact that specific usury ceilings did not exist at common law can be misleading: to some it suggests that the interest restrictions contained in modern usury statutes are novel restrictions on previously unregulated lending and thus these restrictions should be narrowly construed because they would be in derogation of common law.4 In fact, at early common law it was forbidden to charge any interest at all, and common law recognized an action to recover usury (i.e., interest) paid.5 The firs

Consumer Credit Regulation: 7.2.1.3 Remedial vs. Penal Purposes

The conflict between the broad construction of remedial statutes and the narrow construction of penal statutes also may cloud statutory construction issues. Specifically, usury statutes seek to protect impoverished debtors from the exploitation of avaricious lenders7 and to compensate debtors for the damages they have incurred through the payment of usurious interest. These remedial purposes are a reason to construe ambiguous provisions broadly to protect consumers.8

Consumer Credit Regulation: 7.2.1.4 The Purpose of Special Usury Laws

Regardless of the nature of usury laws in general, there are sound reasons to argue that the particular usury statutes most often involved in consumer cases—small loan laws, installment sales acts, second mortgage acts, and consumer credit codes—are distinguishable from general usury statutes and should be more liberally construed.13 General usury statutes were, for the most part, adopted prior to the twentieth century at a time when consumer credit was limited, almost to the point of non-existence.14

Consumer Credit Regulation: 7.2.3 Deference to Administrative Interpretations

Another principle of statutory construction that arises in usury cases is that courts will defer to the interpretation of a statute by an agency that is charged with administering it.27 This principle sometimes helps consumers but sometimes hurts them. If the state agency that regulates financial institutions is overly friendly to the industry, its interpretations may be unhelpful to consumers.

Consumer Credit Regulation: 7.4.2.1 No Arbitration Requirement for Manufactured Home Loans

The Truth in Lending Act (TILA) requires that no manufactured home loan include an arbitration requirement.50 The provision applies to “residential mortgage loans,” which are defined to include a consumer credit transaction that includes a security interest in a consumer’s dwelling.51 The term “dwelling” is defined to include a manufactured home.52 This TILA provision also provides that no other agreement between the consumer and the creditor

Consumer Credit Regulation: 7.4.2.3 Limits on Arbitration Involving Military Personnel

Federal law prohibits arbitration clauses in consumer credit agreements with military personnel or their dependents, or the enforcement of such a consumer credit agreement.63 An arbitration requirement though is unenforceable even after the consumer is no longer a servicemember or a dependent of a servicemember, as long as the consumer was covered by the Act when the credit was originated.64

Consumer Credit Regulation: 7.4.2.7 When Arbitration Requirement Conflicts with Federal Statutory Rights

An arbitration requirement that prevents effective vindication of federal statutory remedies or rights is likely to be found unenforceable,86 with the exception of limits on class relief, that are still enforceable.87 Also subject to challenge are high arbitration fees, high arbitrator costs, and other arbitration costs that make it impractical for consumers to vindicate their federal statutory rights.

Consumer Credit Regulation: 7.4.3.1 Defendant Must Produce the Arbitration Agreement

Arbitration is a matter of agreement between the parties. If there is no agreement, then there is no arbitration requirement. With the exception of some smaller creditors, arbitration agreements are almost universal in contracts involving mobile wireless, private student loans, payday loans, and prepaid cards. On the other hand, as of 2015 only somewhat more than half of credit card agreements contained arbitration requirements.90

Consumer Credit Regulation: 7.4.3.2 Was the Agreement Properly Formed?

An arbitration requirement is a matter of contract, and like any contract, it is not binding on the parties unless the contract is properly formed. This requires assent from both parties, usually by valid signatures. The consumer must have the capacity to assent, and any amendment to the consumer credit contract adding the arbitration agreement (such as in a bill stuffer) must be shown to be binding on the parties.91 Agreements cannot be reached unilaterally.

Consumer Credit Regulation: 7.4.3.3 Where the Sole Designated Arbitration Forum Is Unavailable or Non-Existent

Arbitration agreements typically specify one or more arbitration forums that will administer the arbitration, such as the American Arbitration Association (AAA) or JAMS. These two organizations have consumer protocols and AAA requires creditors to register their arbitration agreements with the AAA. AAA and JAMS may refuse to administer the arbitration if the creditor’s arbitration agreement does not meet the forum’s consumer protocols or, in the case of the AAA, if the creditor is not currently registered.

Consumer Credit Regulation: 7.4.3.5 Where Usury Voids the Contract

One might think that a usurious or illegal contract that is unenforceable under state law would also mean that the arbitration requirement is unenforceable. But the Supreme Court has stated that this is not the case. Rather, the arbitration clause must be looked at independently from the rest of the contract.96

Consumer Credit Regulation: 7.4.3.6 Has the Creditor Waived the Arbitration Requirement?

A creditor cannot participate in court litigation on a matter and then suddenly change its mind and require the case to be sent to arbitration. The creditor’s waiver need not cause prejudice to the consumer.97 Similarly, the creditor may waive the right to arbitrate where it fails to pay required arbitration fees or otherwise refuses to participate in the arbitration.98

Consumer Credit Regulation: 7.4.4 Does the Arbitration Agreement Apply to the Dispute and to the Parties?

In general, only the parties to the arbitration agreement are bound by the agreement.102 While the creditor’s assignees and agents may be able to invoke the arbitration requirement, other third parties, such as independent contractors or insurance companies, should not be able to invoke it.103 Similarly, consumers (such as family members) who do not sign an arbitration agreement are generally not bound by it.104

Consumer Credit Regulation: 7.4.5 Does the Court or Arbitrator Determine Arbitrability?

A preliminary matter in any challenge to the enforceability of an arbitration clause is whether the enforceability determination is to be made by a court or by the arbitrator.107 In Rent-A-Center, West, Inc. v. Jackson,108 the Supreme Court held that, “ordinarily,” issues about whether parties have agreed to a valid arbitration clause are for a court—not an arbitrator—to decide.

Consumer Credit Regulation: 7.4.5a Proceeding to Individual Arbitration

Where an enforceable arbitration agreement forecloses class arbitration, class court litigation, and individual court litigation, adequate client representation may require raising the consumer’s claims in an individual arbitration proceeding. While this is not preferred, under some circumstances consumers may achieve good results, particularly if the selected arbitrator has an open mind on consumer claims.

Consumer Credit Regulation: 7.4.6 Class Arbitration

Where an arbitration clause prohibits class-wide relief, an arbitrator is unlikely to allow such relief, and a court would almost certainly overturn such an award. Two Supreme Court decisions make it very difficult to challenge a prohibition against class-wide relief as unconscionable.