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Consumer Credit Regulation: 5.11.1 Developing a System for Analyzing Consumer Credit Issues

Generally, clients do not complain to their attorneys about specific usury issues. For example, it would be fairly unusual for a client to waltz into a law office saying, “I think the bank overcharged me $0.39 for credit insurance which is arguably interest and possibly a usury violation.” More likely a client will appear after the transaction has gone sour for one reason or another. It then becomes the attorney’s job to analyze the facts and issues relevant to the transaction.

Consumer Credit Regulation: 5.11.2 Gathering Information from the Client

The first step is to gather as much information as possible directly from the client. Obviously the client must be carefully and methodically interviewed, to get the entire story, from the beginning to the end of the transaction. As explained below, the client must also be asked to give the lawyer all of the relevant documents from the transaction.

In the hypothetical, the following questions suggest possible lines of inquiry regarding the financial aspects of the transaction for the client interview:

Consumer Credit Regulation: 9.1.1 Introduction

There is no universal definition of “payday loan.” State laws refer to payday loans by many different terms and define them with even greater variation.1 Nevertheless, a payday loans is typically considered a short-term, unsecured, high-cost loan repayable on the borrower’s next payday.2

Consumer Credit Regulation: 9.1.2.2 Bank Payday Loans

Beginning around 2011, banks began offering their own versions of payday loans, generally referred to as “deposit advance products.” A bank would advance funds to a consumer, typically for a fee such as $7.50 or $10.00 per $100, and the funds would be automatically repaid upon the consumer’s next direct deposit.41 According to a 2011 study, the median loan length was ten days.42 If the loan was not repaid in full within a designated time—usually thirty-five days—the bank forced repayment by sweeping

Consumer Credit Regulation: 9.1.3 Is the APR a Fair Cost Measurement for Payday Loans?

Most payday lenders quote the cost of credit using add-on interest,58 such as $30 per $100 borrowed. But the federal Truth in Lending Act requires payday lenders to disclose the annual percentage rate (APR) of loans, which is an actuarial rate that better discloses the true cost of the credit because it takes into account the term of the loan as well as both interest and fees.

Consumer Credit Regulation: 9.1.5 Problems and Abuses

A growing body of independent academic research has documented the adverse impact on consumers who use payday loans. Cash-strapped consumers rarely have the ability to repay the entire loan when their payday arrives because doing so would leave little or nothing on which to live until the next paycheck. Lenders encourage consumers to repay one loan with another or to return for new credit a few days after paying off a previous loan.87 The result is that the consumer pays another round of charges and fees and remains trapped in debt.

Consumer Credit Regulation: 9.2.1 Conditioning Payday Loan on EFT Repayment

Since they cannot conveniently accept paper checks, internet-based payday lenders commonly have the borrower authorize an electronic fund transfer to repay the loan.111 The Electronic Funds Transfer Act (EFTA) prohibits any person from conditioning the extension of credit upon the consumer’s repayment by means of a preauthorized electronic fund transfer.112 In order to fall within this ban, the transfer must both meet the definition of an “electronic fund transfer” (EFT) and be a “preauthorized,

Consumer Credit Regulation: 9.2.3 Bad Check Prosecutions

Another payday lending abuse occurs when a lender aggressively uses a state bad-check law to claim large penalties when a check is dishonored. The check in a payday loan serves a dual function—it is security for the loan and a method of repaying the debt at a later time.130 As a result, any default will necessarily involve bouncing a check.

Consumer Credit Regulation: 9.2.5 Early Presentation of Post-Dated Checks

Many storefront payday lenders require a post-dated check as security for a loan. But most consumers do not realize that, under the UCC, a check is payable when it is presented to the bank, even if it is post-dated.144 This means, if a payday lender attempts to present the consumer’s check early, a bank will normally pay it regardless of the date.

Consumer Credit Regulation: 9.2.6 Unauthorized Payments and Charges

Another potential abuse is the presentation of a check or electronic debit that the consumer has not authorized. The UCC sets out rules for forged or altered checks. In general, consumers are not liable for the payment of forged or altered checks under the UCC.146 Similarly, the EFTA protects consumers from liability for unauthorized electronic fund transfers.

Consumer Credit Regulation: 9.2.7.2 Revoking the Lender’s Authorization to Debit the Account

The UCC does not provide the right to revoke authorization of checks or remotely created checks. However, NACHA rules give consumers the right to revoke authorization for ACH payments (electronic payments through the ACH system) as long as the consumer provides sufficient notice.150 The Electronic Fund Transfer Act also implicitly gives consumers the right to revoke authorization for preauthorized (i.e., recurring), but not single, electronic fund transfers.151

Consumer Credit Regulation: 9.2.7.3 Stopping Payment on a Check or Preauthorized Electronic Fund Transfer

In light of the uncertainty about whether a lender will honor a revocation of authorization, the easiest way to prevent the immediate transfer of funds to the payday lender is to stop payment with the bank. Banks charge steep stop payment fees, which can be nearly as high as the payment the consumer is trying to stop. However, if the consumer has stopped payment on recurring electronic fund transfers, the bank must stop all future payments for the particular debit.153

Consumer Credit Regulation: 9.2.7.4 Payday Lenders’ Evasions

Some payday lenders have identified ways to evade stop payment orders. One such way is by using remotely created checks or electronic payments to split the payment into smaller amounts so that it no longer matches the check described in the stop payment order. This should be considered an unfair or deceptive practice and potentially an unauthorized transfer under the EFTA if an electronic transfer is involved.161

Consumer Credit Regulation: 9.2.8 Closing Accounts

Because stop payment orders are unlikely to permanently protect a consumer’s assets from an aggressive payday lender, a consumer may be safer closing her bank account to prevent a payday lender from draining it. The UCC gives consumers the right to close their bank accounts.162 And the official comments to the UCC say that a bank should bear any loss caused by the bank’s failure to timely close the account, if the consumer has complied with reasonable procedures.163

Consumer Credit Regulation: 9.3.1 General

States vary widely in how they approach payday loan regulation. The degree of regulation ranges from outright prohibition to the codification of caveat emptor. The question of whether payday lending is legal may depend on definitions and business practicalities. In some states, traditional, single-payment, short-term payday lending is technically legal but interest rate caps amount to a de facto ban because the loans cannot be profitably made.

Consumer Credit Regulation: 9.3.2 Alabama

In Alabama, the Deferred Presentment Services Act171 authorizes payday lending. The law places certain limitations on payday lenders. Payday lenders may not require borrowers to provide security for transactions or guarantors.172 But a personal check is not considered a security interest under the Act.173 The maximum amount that may be advanced in any transaction is $500.