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Consumer Credit Regulation: 10.2.6.2.2 Examples of the application of an unconscionability standard to high-rate installment loans

State ex rel. King v. B&B Investment Group144 is an example of the application of a prohibition of unconscionability in a state deceptive practices statute to a high-cost installment loan. In that case, a suit brought by the state attorney general, the New Mexico Supreme Court in 2014 held that a subprime lender’s unsecured loans were procedurally and substantively unconscionable. The lender had formerly made payday loans in the state, but moved into unsecured installment lending when the state enacted payday loan reforms.

Consumer Credit Regulation: 10.2.6.2.3 The absence of a rate cap does not prevent the application of an unconscionability standard

The fact that a state does not cap interest rates and charges does not mean that those charges cannot be found unconscionable. Stressing the differences between an unconscionability standard and a numerical rate cap, the California Supreme Court held in De La Torre v. CashCall, Inc.154 that the fact that the legislature had not chosen to place a numerical cap on interest for loans of $2,500 or more did not prevent the court from applying the unconscionability standard to such loans.

Consumer Credit Regulation: 10.5.1 State Statutory Requirements

Few states require creditors to evaluate a borrower’s ability to repay an installment loan, and the states that have such a requirement vary widely in specificity and, as a result, enforceability. In several states, the ability-to-repay requirement appears to do no more than serve as window dressing for a lending law that allows abusively high rates.

Consumer Credit Regulation: 10.8 Licensure

Licensure is an important way for states to control which lenders operate in the state and to determine whether they are complying with state law. All states except Arkansas (which does not allow high-rate lending) require non-bank installment lenders to be licensed or registered.

Consumer Credit Regulation: 10.9.4.2 States That Cap Both Open-End Interest and Fees

As of 2022, about 30% of the states have statutes that cap both the interest rate and associated fees and charges for open-end credit extended by non-bank lenders.310 However, these caps vary and, in some states, are outrageously high. Tennessee is the prime example. Its 2014 “Flexible Credit Act” allows fee-inclusive APRs of 279% on open-end cash advances up to $4,000.311

Consumer Credit Regulation: 10.9.4.3 Where State Law Only Caps the Interest Rate, Not Fees

About a quarter of the states have statutes that cap interest rates for open-end credit extended by non-banks, but do not have numerical caps on at least one loan fee—for example, an origination fee or an annual fee—that lenders charge as a condition of an extension of open-end credit.314 These states may give the appearance of protecting consumers but, depending on how they are interpreted, the lack of an explicit cap on fees may still allow extremely high rate loans.

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: 7.4.2.1 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: 7.4.3.3 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: 7.4.3.6 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: 7.4.5a 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: 7.5.1.1 Overview of Elements

In the traditional usury case courts often recite four elements that a borrower must establish: (1) the existence of a loan or forbearance; (2) an absolute obligation to repay principal; (3) an interest overcharge; and (4) the usurious intent of the lender.126

Consumer Credit Regulation: 7.5.2.2.1 Time-price exception to usury laws

Absent specific statutory guidance, the chief uncertainty about the definition of a loan is whether this term includes credit extended in connection with the installment sale of goods or services. When interpreting a statute that applies only to loans, not to the forbearance of an obligation or the detention of money, courts may require the debtor to show that the transaction involved a transfer of money that was to be repaid, thereby excluding purchase and sale transactions.180

Consumer Credit Regulation: 7.5.3.1 Overview

It is often stated that the second element of a traditional usury case is the debtor’s absolute obligation to repay the principal amount of the money transferred to him or her.222 To the extent that this second element exists, it is closely intertwined with the first, i.e., the existence of a loan, because in the absence of an absolute obligation to repay, it is quite plausible to argue that a transfer of money is a gift or an investment rather than a loan.